Business Entity Selection
When starting a new business, you must decide which business entity you want to structure. Which structure you choose will have its own tax and legal considerations. This will also dictate which tax forms you need to file each year.
Anyone that owns an unincorporated business by himself or herself. Sole Proprietors typically file Tax Form 1040 with a Schedule C.
A Partnership is a relationship between two or more people to conduct trade or business.
A Partnership files an informational return on Form 1065 yearly but does not pay income tax. It acts as a pass-through and issues a K-1 to each individual partner who then reports the profit or loss on their personal tax return.
When forming a corporation, the prospective shareholders would exchange money, property, or both for the corporation’s capital stock.
Corporations generally take the same deductions as sole proprietors to figure out taxable income. However, a corporation can also take special deductions.
A C Corporation is considered a separate taxpaying entity for federal tax purposes. It conducts business, realizes net income or loss, pays taxes, and distributes profits to its shareholders.
An S Corporation is a corporation that makes the election to pass corporate income, losses, deductions, and credits through to their shareholders, who then report them on their personal tax returns.
Limited Liability Company (LLC)
A Limited Liability Company is a business structure allowed by state statute, and you should check with your state if you are interested in starting an LLC.
Owners of an LLC are called Members, and there is no maximum number of members.
From time to time, some business entities need to restructure to increase financial, tax, and operating efficiencies. This restructuring involves many complexities, including tax, accounting, and financial reporting.