Business Entity Choices
The www.irs.gov website provides basic federal tax information for people who are starting a small business. Although the information is not all-inclusive, it is sufficient to help you make basic business entity decisions. When starting a business, you must decide what form of business structure to establish. Your form determines which income tax return you must file. The most common forms of business entity are:
A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation. A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor, or skill and expects to share in the profits and losses of the business. A partnership must file an annual information return to report the income, deductions, gains, losses etc. from its operations, however it does not pay income tax. Instead, it passes through any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her personal income tax return. Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions. When forming a corporation, prospective shareholders exchange money or property (sometimes both) for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. The profit of a corporation is taxed to the corporation when earned. Then, it's taxed to the shareholders when distributed as dividends. However, shareholders cannot deduct any loss of the corporation. An eligible domestic corporation can avoid double taxation (first to the shareholders and then to the corporation) by electing to be treated as an S corporation. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their personal income tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss and credit, as well as their share of non-separately stated income or loss. A Limited Liability Company (LLC) is a relatively new business entity allowed by state statute. They are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation. Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner. In all likelihood, you will begin your small business as a sole proprieter due to its simplicity. Completing Form Schedule C and attaching it to your normal Form 1040 tax filing is much easier than completing partnership or corporate forms. In addition to understanding how to file your taxes in the correct manner, make sure you comply with state law and register your small business entity before conducting any business. Once you're comfortable with your choice of business entity, get serious about finding the right small business tools. There are literally billions of pages on the worldwide web. So, make sure you purchase site building tools that give you the best advantage to have your particular web business found by the search engines.
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