Choose Your Own Adventure: Which Business Entity is Right for You?

Choose Your Own Adventure Which Business Entity is Right for You? The most common forms of business: Y Sole proprietorship Partnership Corporation S corporation Limited Liability Company (LLC) Single Owner? Choose Sole Proprietorship Just 1 business owner Married couples don't count A sole proprietorship must The other spouse can as 1 owner unless they meet 4 specific requirements be solely owned by 1 spouse. work in the business as an employee. for a qualified joint venture. You do not have to take any formal action to form a sole proprietorship. Consulting work Status automatically comes from your business activities. Freelancer Sole proprietors do need business licenses and permits. The business itself is not taxed separately. The sole proprietorship income is your income. You report income and/or losses and expenses with: The "bottom-line amount" Schedule C The standard Form 1040 from Schedule C transfers to your personal tax return As the owner, you're responsible for: 14 All income taxes • Self-employment taxes • Estimated taes All profits All your business's debts, losses, and liabilities Sole proprietorships Best for: Not great for: Limited liability protection No long-term commitment for the owners If you want to build up Low-hassle start and stop a real business TAX Companies that will hire Simple taxes employees or otherwise AAA have liability risks Two or More Owners? Choose Partnership *****. Each partner More than 1 owner contributes to all aspects of the business. Money Property Labor Skill Each partner shares in the profits and losses of the busiess. There are two basic types of partnerships: General Partnership If you have an unequal Assumes profits, liability, distribution, the percentages and management duties assigned to each partner are divided equally must be documented in the among partners. partnership agreement. Limited Partnership Also known as a partnership More complex than with limited liability general partnerships Limits depend on the extent of each partner's Allows partners to have • Limited liability • Limited input в investment percentage Attractive to investors in short-term projects To form a partnership Register your business with your state, Get your business licenses and permits. generally at your Secretary of State's office. TAX Not a separate tax entity from its owners Called a "pass-through entity" The partnership itself does not pay any income taxes on profits. Business income "passes through" the business to the partners • Each partner reports their share of profits or losses on their individual income tax returns. The partnership must file IRS Form 1065. Reviewed by the IRS Itemizes each partner's share of the partnership renort their incomes to make sure partners An informational retun Filed annually profits or losses correctly Partnership taxes generally include: TAX TAX O TAX Annual return of income Employment taxes Excise tax Partners in the partnership are responsible for several additional taxes, including: TAX TAX TAX TAX Income tax Self-employment tax Estimated tax Best for: Not great for: Limited liability protection Low-hassle start and stop for the owners Shared financial Partners who don't see commitment eye to eye People who are concerned People who have about fair distribution complementary skills of profits Have Shareholders? Choose Corporation More complex than other business structures TAX TAX May require more tax preparation services More regulations and tax requirements than a sole proprietorship or a partnership Independent legal entity, separate and apart from those who own it Owned by shareholders Any person, company, or other institution that Will profit if the Will lose if the May also be referred to as a stockholder" owns at least one share company does well company does poorly of a company's stock Two main kinds of corporations Traditional corporation (C Corp) $ TAX Shareholders who are also employees Pay income tax on their profits pay income tax on their wages. TAX TAX TAX The corporation itself, not the shareholders In some cases, corporations are taxed twice that own it, is held legally liable for the actions and debts the business incurs When the company makes a profit tax on its profits. Again when dividends are paid to shareholders on their personal tax returns Subchapter S corporation (S Corp) Special type of corporation Limits the financial liability for which created through an IRS tax election the owner or shareholders are responsible ...... ***--- Allows income to flow through the corporation without being taxed until The business is not taxed it is claimed as income by the shareholders Any shareholder who works for the company Only the shareholders are taxed must pay him or herself fair market value Best for: Not great for: Those needing or wanting pass-through taxation Businesses seeking venture capital or other outside investment (except for S corps) Those who don't like holding Ongoing profitable business meetings and dealing with formality Limited liability protection for the owners Half Partnership, Half Corporation? Choose Limited Liability Company (LLC) Hybrid type of legal structure Has the limited liability features of a corporation Has the tax efficiencies and operational flexibility of a partnership Owners are called "members." Depending on the state, members can be: A single individual Two or more individuals Corporations Other LLCS (one owner) Like a partnership, LLCS are not taxed as a separate business entity. TAX ALll profits and losses are "passed through" Members report profits and losses the business to each member. on their personal federal tax returns, just like the owners of a partnership. Like a corporation, an LLC is a separate and distinct legal entity, just not for taxes. Members are not personally liable for the debts and liabilities of the company. An LLC can, LLC® under its own name: TAX Get a tax identification number Open a bank account and do business Members are considered self-employed. USA Must pay the self-employment tax contributions towards Medicare and Social Security In many states, when a member leaves an LLC, the business is dissolved. Members must fulfill all remaining legal Remaining members can decide and business obligations to close the business. if they want to start a new LLC or part ways. Best for: Not great for: Investing in real estate and passive investments Those seeking professional investment (venture capital) Non-US residents doing business in US, Corporate subsidiaries particularly Canadian residents Limited liability protection for the owners Choosing the best business entity for your company can be an adventure. Learn as much as you can about each type to make the process faster and easier. Once you're well-informed, you, your business associates, your accountant, and your lawyer can help ensure you make the best decision." www.legalzoom.om www.usa-corporate.com www.investopedia.com www.nolo.com mashable.com www.irs.gov www.sba.gov Brought to you by: In partnership with: SURE PAYROLL A Paychex® Company GHERGICH&Co. ..***..