Choosing Your Business Structure

by VENDIREX on 07/05/2015 - 03:05 pm |

Tags: Brand Management, Maintenance Management

When deciding upon which type of entity is best for your business, the way the Internal Revenue Service determines its taxation is the generally the most important factor. Legal considerations are also a part of the puzzle, and therefore an attorney should be at least consulted in most cases.


There are five basic business incorporations from which to choose, and here are the major elements of each:  


Sole Proprietor - This is an individual who owns and operates an unincorporated business on their own. You will file a 1040 tax return, showing your profit/loss on Schedule C, and determining your Self-employment tax due on Schedule SE. Estimated taxes (form 1040-ES) are usually required once you have filed an annual return with monies owed to the IRS.


Partnerships - An entity established between two or more individuals in order to operate a trade or business. All members will have a designated percentage in which they are invested in the concern; contributing cash, labor or property and sharing in the profit/loss of the company. A 1065 is filed annually, passing through the income and expenses, any gains or loss to the individuals (via a 1065 K-1 form) who will each file their own 1040 tax return. Tax liability belongs to the individual partners, not the partnership itself.


Corporations - Individual shareholders exchange cash and/or property for capital stock. The corporation is the taxable entity and it distributes profits to its shareholders. These profits are then taxable to the shareholders as dividends; effectively creating a double tax. Shareholders cannot deduct any losses; income and loss is realized by the corporation itself. Estimated taxes are paid with the 1120-W, and the corporation files an annual Form 1120


“S” Corporations - These are entities which have elected to pass income/loss, deductions and credits through to its shareholders (via an 1120S Schedule K-1), who in turn will file their personal return on a 1040. The shareholders are assessed at their individual income tax rates, allowing S corporations to avoid the double taxes of a standard corporation. The S corporation is liable for gains and passive income. These corporations must be domestic; cannot have shareholders which are themselves are partnerships, corporations or non-resident aliens; made up of no more than one hundred shareholders; may only issue 1 class of stock; cannot be an ineligible corporation, such as insurance firms, specific financial institutions, and domestic corporations with international sales.


Limited Liability Corporation (LLC) - Governed by state laws, regulations can vary considerably, and the annual income report Form 1065 is filed with the state in which is does business, with the income and tax liability passing through to its members via a Form 1065 Schedule K-1. The members file their own taxes using a 1040. Members of the LLC may include persons, corporations, other LLCs as well as foreign entities (for which there may be specific rules); are not limited to any maximum number; may consist of only one owner; generally may not consist of banks or insurance companies. A domestic LLC with more than one member is actually classified for tax purposes as a partnership; unless it files a Form 8832 wherein it elects to be considered as a corporation. A 1-member LLC is considered as one with its owner as far as income tax, but a separate entity when it comes to excise and employment taxes; unless it files Form 8832 electing treatment as a corporation.




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