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This piece originally appeared on AllBusiness.

When forming and operating a startup, entrepreneurs face some critical tax issues. By paying attention to these issues, startups can position themselves to take advantage of some meaningful tax benefits and avoid tax problems. Here are 9 key tax issues to consider:

1. Forming the Company as a C Corp, an S Corp, or an LLC

The founders of a company must initially determine whether to organize the company as a limited liability company (LLC) or a corporation. If formed as a corporation, the company must also determine whether to file an election to have it taxed as an “S corporation” rather than a “C corporation.”

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their stockholders for tax purposes. Stockholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates (so called “flow-through taxation”). This allows S corporations to generally avoid double taxation on the corporate income.

To qualify for S corporation status, the corporation must meet the following requirements:

Be a domestic corporation

Have only allowable stockholders (i.e., individuals, certain trusts, and estates but not partnerships, corporations, or non-resident alien stockholders)
Have no more than 100 stockholders
Have only one class of stock
Not be an ineligible corporation (i.e., certain financial institutions, insurance companies, and domestic international sales corporations)

In order to become an S corporation, the corporation must submit IRS Form 2553 Election by a Small Business Corporation (PDF) signed by all the stockholders. See the IRS Instructions for Form 2553 for required information and to determine where to file the form.

A C corporation under federal income tax laws is one that is taxed separately from its owners. Generally, all for-profit corporations are classified as C corporations, unless the company validly elects to become an S corporation. A C corporation does not have limits as to who could be the stockholders (as S corporations do). And C corporations may have different classes of stock (such as preferred stock and common stock), which is not allowed for S corporations. Venture capitalists will typically only invest in preferred stock in a C corporation.

An LLC is another entity that provides limited liability to its owners the way C and S corporations do, and an LLC also provides flow-through taxation to its owners.

So what type of entity should a founder form?

If the company will be getting outside investors, it will most likely need to be a C corporation.
If it’s a simple company with one or two individual owners, an S corporation makes sense.
If the owners want greater flexibility for types of owners and wish to avoid the restrictions of S corporations, then an LLC or C corporation makes sense.

2. Qualified Small Business Stock

If the stock of a startup meets the requirements of “qualified small business stock” (QSBS), 100% of the gain on the sale of such stock held by a non-corporate taxpayer for more than five years may be excluded from income. In addition, gain on the sale of QSBS held for less than five years may qualify for a tax-free “rollover” treatment if the sale proceeds are reinvested in another QSBS within 60 days after the sale.

Rules applying to QSBS were created to urge investment in certain small businesses by allowing investors the opportunity to avoid tax on some or all of their gain from the disposition of QSBS stock.

In order to qualify as QSBS, the stock must be issued by a C corporation which is a “qualified small business” at the time of issuance. This requires that the corporation have less than $50 million of gross assets before and after the stock issuance. The stock must be acquired by the taxpayer at original issuance for money or property or as compensation, and the company must meet prescribed “active business requirements” during substantially all of the taxpayer’s holding period for the stock.

For more on tax, watch this Fortune video:

3. Granting Stock Options and 409A Issues

Stock Option Plans are an extremely popular method of attracting, motivating, and retaining employees, especially when the company is unable to pay high salaries. A Stock Option Plan gives the company the flexibility to award stock options to employees, officers, directors, advisors, and consultants, allowing these people to buy stock in the company when they exercise the option.

Stock Option Plans permit employees to share in the company’s success without requiring a startup business to spend precious cash. In fact, Stock Option Plans can actually contribute capital to a company as employees pay the exercise price for their options. The spectacular success of Silicon Valley companies such as Facebook and Google (GOOGL), and the resulting economic riches of employees who held stock options in these companies, have made Stock Option Plans a powerful motivational tool for employees to work for the company’s long-term success

The primary disadvantage of Stock Option Plans for the company is the possible dilution of other stockholders’ equity when the employees exercise their stock options. For employees, the main disadvantage of stock options in a private company—compared to cash bonuses or greater compensation—is the lack of liquidity.

The primary tax issue for the company in granting stock options is that the company needs to make a determination of the fair market value of its common stock in order to set the exercise price of the option, pursuant to Section 409A of the Internal Revenue Code. This is often done by hiring a third-party valuation expert.

In the case of a company that is organized as an LLC, “profits interests” may be issued instead of stock options. These profits interests, like options, entitle employees to participate in the future income and appreciation in the value of the company, with capital gain treatment applicable to any capital gain generated by the LLC and passing through to the employee.

4. Sales Tax Issues

The business may be subject to taxes from the sale or lease of goods and services, commonly referred to as a “sales tax” and in some instances as a “use tax.” The sales tax is calculated by multiplying the purchase price times the applicable tax rate. The applicable tax rates vary by state (California has the highest state tax rate). In some states, cities and counties can levy an additional sales tax.

Sales tax is required to be collected by the seller at the time of sale. The seller must file tax returns and remit the tax to the state and city/county that imposes a sales tax.

The category of goods and services that are subject to sales tax depends on the state, city, or county. But there are typically many exempt categories of goods or services from the sales tax.

How can a business determine what it needs to do to comply with the sales tax rules? There are numerous tax software services, easily found via a Web search, that can help you determine what is owed and set up the required tax filings.

5. Payroll Tax Issues

Startups have to pay state and federal payroll taxes on employee compensation. Payroll taxes are usually calculated as a percentage of the salaries the company pays to its employees. The taxes are taken out of (withheld from) employee pay, are collected by employers, and paid by employers on behalf of the employees and the company.

U.S. federal taxes include federal income tax withholding owed by employees, which is calculated from the amount provided by the employee on IRS Form W-4 at the time of hire. The tax also includes amounts paid for Social Security and Medicare (called FICA taxes), where the employer deducts the employee’s share (one-half of the amount due) from the employee’s paycheck, and the employer paying the other half. The employee tax rate for Social Security is 6.2%. The employer tax rate for Social Security is also 6.2% (12.4% total, subject to a total dollar cap each year). The employee tax rate for Medicare is 1.45% (which is withheld from the employee’s paycheck) and the employer must also pay 1.45%.

Failure to address the payroll tax issue can result in major penalties. Not filing or paying payroll taxes can be considered a federal crime if the IRS can prove you intentionally didn’t file or pay.

The IRS can also come after owners of the business for unpaid payroll taxes (even if the business is set up as a corporation or LLC).

Generally, the business must make a federal tax deposit (by tax filing service, phone, or in person at a bank) within 3 days after the payroll checks are issued. State and city tax deposits may also apply.

6. Deductions for Home Office

Many small businesses attempt to deduct a home office for tax purposes. This has long been contentious with the IRS. A home office must be a separate office, used solely for business purposes. The home office deduction is available for homeowners and renters.

There are two basic arguments for a home to qualify for a home office deduction:

Regular and Exclusive Use. You must use part of your home for conducting business. For example, if you use an extra room to run your business, you can take the home office deduction for that room.
Principal Place of Business. You must show that you use your home as your principal place of business.

Generally, deductions for a home office are based on the percentage of your home devoted to business use. IRS Publication 587, “Business Use of Your Home,” sets forth the requirement for qualifying to deduct expenses, how to figure the deduction, and what records you should keep.

7. Net Operating Losses

In the case of a company organized as a C corporation, any tax losses generated in its business produce no current tax benefit, but may be carried forward as “net operating losses” (NOLs) and offset taxable income in subsequent years. The founders of the company should be aware that if there is more than 50% change in ownership of the company during any three-year period (due to company issuances of additional stock and/or stockholder transfers of stock), any NOLs generated prior the change in ownership generally may be used in each year thereafter only to a limited extent, based on the value of the company’s stock at the time of the change multiplied by a percentage prescribed on a monthly basis by the IRS (currently approximately 2.5%). A company’s need for raising capital by issuing additional stock to new investors will usually outweigh the benefit of preserving the unlimited use of its NOLs.

8. Employee vs. Independent Contractor Issues

It is critical for tax purposes that the company correctly determines whether individuals providing services to the business are employees or independent contractors. Employers run the risk of improperly characterizing independent contractors. Many startups prefer to use independent contractors to avoid paying Social Security, Medicare taxes, and unemployment taxes and to avoid providing health insurance coverage.

But the IRS is paying more attention to misclassification issues. In fact, companies like Uber that treat workers as independent contractors are under scrutiny. If the employer has significant control over the worker, the IRS may claim the worker should have been classified as an employee. The IRS gives some guidance in IRS Publication 15-A.

Companies must give their workers IRS Form W-2 setting forth their compensation for the year, and Form 1099 to independent contractors, by February 1st of each year.

9. Properly Documenting All Income and Deductible Expenses

Every business needs to employ a recordkeeping system that accurately and completely captures all income and deductible expenses. Some businesses use an ordinary check book for this system, but many businesses choose to use electronic accounting software programs such as QuickBooks.

The IRS suggests that these are the types of records a small business should keep by category:

Gross Receipts of the income you receive from the business:

Cash register tapes
Deposit information (cash and credit sales)
Receipt books
Invoices
Forms 1099-MISC

Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:

Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred
Cash register tape receipts
Credit card receipts and statements
Invoices

Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and a description that shows the amount was for a business expense. Documents for expenses include the following:

Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred

Cash register tapes
Account statements
Credit card receipts and statements
Invoices
Petty cash slips for small cash payments

Travel, Transportation, Entertainment, and Gift Expenses
If you deduct travel, entertainment, gift, or transportation expenses, you must be able to substantiate certain elements of those expenses. For additional information, refer to IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets should show the following information:

When and how you acquired the assets

Purchase price
Cost of any improvements
Deductions taken for depreciation
Deductions taken for casualty losses, such as losses resulting from fires or storms
How you used the asset
When and how you disposed of the asset
Selling price
Expenses of sale

Employment taxes
There are specific employment tax records you must keep. Keep all records of employment for at least four years. For additional information, refer to IRS Recordkeeping for Employers and Publication 15, Circular E Employers Tax Guide.

Richard D. Harroch is a Managing Director and Global Head of M&A at VantagePoint Capital Partners. Grady Bolding is a partner in the Tax Department of Orrick, Herrington & Sutcliffe in San Francisco.