Tax Basics for Startups Part one in a three-part series to help get your business started on a strong foundation.

Just because you can run the machine doesn't mean you can run the machine shop. If you're launching a business, you'll want to start with your books in order. Here are three tips to help you avoid tax troubles down the road.

1. Hire a tax pro and a bookkeeper. One of the first team players you need is a tax pro -- someone to set up your books and give you advice about the tax end of things. Because not only do you pay income taxes on the profit your business generates, but you also pay 15.3 percent self-employment tax, which funds your Social Security and Medicare accounts. It can get real expensive real quick. Your tax pro can help you minimize the hit and instruct your bookkeeper to make sure you are taking every deduction to which you are entitled.
   
   Hiring a bookkeeper can be tricky and should not be based on looks alone. Business owners often understand their product or service but are oblivious when it comes to understanding their books and financial statements. This means they cannot determine whether or not their bookkeeper is doing a good job. Years of prior bookkeeping experience listed on a resume doesn't mean a thing. You need to give potential candidates a bookkeeping test to determine their eligibility.
   
   
2. Choose a legal entity. A tax pro, along with your attorney, can help you decide which type of legal entity best suits you. I generally advise my clients to start out as a sole proprietorship. This works well if it's one individual without partners. It's the simplest method for income tax reporting and the least expensive to start. The exit strategy involves taking down your sign and walking away -- no more, no less. Once things are rolling and success is imminent, the business owner can consider incorporating or becoming an LLC.
   
   Of course, you must check with your attorney and tax pro before making this decision. Individual situations vary, and there is no blanket piece of advice to cover this topic. There are legal ramifications, and you may have assets that need more protection than what a good insurance policy will cover. Or there may be other factors to weigh in, especially if you have partners in the venture.
   
   
3. Make estimated tax payments. When it comes to taxes, here's the big surprise: You no longer get a paycheck, right? So your personal needs are met through taking draws from your business account. You did set up a separate business checking account, didn't you? That's a must. You don't want to co-mingle business and personal funds. Because no taxes are withheld from these draws, you must make estimated tax payments on the profit you generate. These payments are due April 15, June 15, September 15, and January 15. Use Form 1040-ES available at www.irs.gov, and make sure you put the current tax year and form number as well as your Social Security number on the memo line of your check. If you live in a state that levies an income tax, you may be liable for prepayment of those taxes, as well.
   
   Your tax pro can help you determine how much you should pay. The standard rule is to prepay 90 percent of your prior-year tax liability. Or if your income for the prior year was more than $150,000, you must prepay 110 percent. The other option is to prepay 100 percent of your current-year liability. This comes in handy if you are having a bad year -- especially if you stepped away from a high-paying job and are faced with the typical first-year loss or minimal profit.

Here are some additional tips to help you avoid running afoul of Uncle Sam at tax time:

• If you deposit personal funds or loan proceeds into your business account, that is not taxable income to the business. It is called a capital contribution and is reflected on the balance sheet under your equity accounts, or if it's a loan it is listed as a liability on the balance sheet.
• Your business's taxable profit is the difference between the sales that you generate and the ordinary and necessary business expenses that you deduct from those sales. You tax liability is not based on the amount of draws you took from the business. Nowhere on your Schedule C does the IRS ask how much you took in draws.
• Taking a home office deduction is not a red flag. It was during the 1990s, but that is no longer the case. If you are using a portion of your home exclusively and on a regular basis, and the home office is your principal place of business, speak to your tax pro about claiming the deduction. He or she will advise you on what expenses to track.