New Business Formation
One of your first critical decisions will be determining which form of business you will create. There are advantages and disadvantages to each. Some considerations include, the legal restrictions, liabilities assumed, number of employees and taxes. We strongly recommend you consult a corporate attorney or tax attorney.
Sole Proprietorship. A sole proprietorship is an unincorporated business that is owned by one person. It is the simplest form of business organization to start and maintain. The business has no existence apart from you, the owner. Its liabilities are your personal liabilities. You undertake the risks of the business for all assets owned, whether or not they are used in the business. You include the income and expenses of the business on your personal tax return.
Partnerships. 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, but 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 items on his or her tax return.
Corporations. In forming a corporation, prospective shareholders exchange money, property, or 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, and then is taxed to the shareholders when distributed as dividends. However, shareholders cannot deduct any loss of the corporation.
S corporations. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) 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 tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss.
Limited liability company. A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. None of the members of the LLC are personally liable for its debts. An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in regulations section 301.770-3 of the IRS code.
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