Form of doing business

Form of doing business

This is a brief outline of the different forms of doing business. Other then operating as a sole proprietorship I recommend you get a book on the form of doing business you are considering and read up on the subject.

Your choices of forms of doing business are.

1. Sole-proprietorship
2. Partnerships
3. Corporations

Sole Proprietorship:

A sole proprietorship is a single owner business. It is easy to set up because it does not require a special license from the government. You file your assumed name, (D.B.A.), with the county court house and you are in business. The bank will want your social security number, or federal tax I.D. number, to open a business checking account.

You are the owner and get to run the show . The profits or losses of running the business are yours. You report them on your individual tax return by filing a IRS schd. "C" income form used for a business or profession.

The disadvantage is that you are responsible for all the businesses losses, debts, obligations, and any judgments obtained against the business. To avoid surprises read all paper work very carefully before signing. Know what you are agreeing to and get advice if you have any doubts.

Partnerships:

A partnership consist of two or more people engaged in business as co-owners. A partnership can be set up like a sole-proprietorship by simply filing the assumed name certificate.

Most partnerships fail because of disagreements between the partners. A written partnership agreement can help avoid potential conflict. I highly recommend that you have a written partnership agreement and that a lawyer reviews it. Most states have adopted the uniform partnership act which requires filing at the county or state level. Your lawyer will make certain you have complied with state law and that all possible contingencies are addressed. A good book on partnerships, with partnership forms on disk, is available from nolo.com

Each partner pays income tax on the profits of the businesses based on their share of the partnership. The partnership files an information return with the IRS each year and gives each partner a copy showing the profits, or losses, that they well need to file with their personal return.

The Ordinary Partnership allows each member to share equally in the profits of the partnership, and each partner is personally liable for any of the debts assumed by the partnership. You can also agree on any un-equal percentage of ownership between the individual partners. The partnership is governed by the terms of the partnership agreement.

In a Limited Partnership one person is designated as the general partner, and runs the business, all other partners are limited partners. Limited partners management roles in the business are restricted, and their losses are limited to the amount invested. Limited partnership interest are considered securities, and federal and state security laws must be complied with. To avoid future problems good legal advice, and assistance in setting up the limited partnership is recommended.

The partnership files an information return with the IRS each year, and gives each partner a copy showing the profits or losses that they well need to file with their personal return.

Corporations:

A corporation is a legal entity. A corporation is set up under state law by filling a corporate charter with the secretary of state. Your attorney should set by the corporation.

The corporation is funded by the sale of shares to the stockholders and managed by the board of directors who appoint the management. The corporation, not the shareholders, own all of the assets of the corporation.

The advantages of a corporation are that it can secure capital and loans more easily. A corporation limits your liability for company obligations. Other advantages have to do with insurance and retirement accounts.

Disadvantages are that a corporation is a more expensive form of business to set up. Also the corporation pays taxes as a corporation and the owners then pay taxes on any dividends that are paid out (double taxation). Another problem is that the required record keeping can be quite extensive.

LLC Limited Liability Company. An LLC is a blending of the the limited liability of a corporation with the tax treatment of a partnership.State laws govern LLC's and the articles of organization are filled at the state level. Because of IRS rules covering LLC's, and state filing requirements as well as the need for an operating agreement and articles of organization, you should consult with your attorney when forming an LLC.

S- Corporations:

S corporations offer the same protections as regular corporations with the exception that the S corporaration does not pay income tax itself . Income passes through to your personal tax return, like it would with a partnership or sole proprietorship.

The advantages are that you avoid the double taxation of a regular corporation.

The disadvantages are that you are limited to 35 shareholders. The receipt of too much passive income, or foreign income, could affect the S corporation status. Foreign tax credits are not allowed and income earned is considered as dividend paid at years end. Net operating losses in excess of the adjusted basis of a shareholders stock value, or debts owed by the corporation to the shareholder, are not deductible. There are many more restrictions, and limitations attached to S corporations and you should consult a corporate CPA & your attorney before choosing S corporation status.

My Recommendation;Â Start as a sole proprietorship, if you can, as it simplifies the process and keeps the start up cost low. The main difference is one of taxes. In a sole proprietorship all losses and profits are taxable to you the year they are earned. In a corporation, the corporation pays the taxes and takes any losses and you are an employee of the corporation as far as the IRS is concerned. In a corporation you take money out by declaring a divided. Thus the income is taxed twice, once as corporate profits, and again as dividend income to the shareholders.

If getting sued because of your business actions is of concern to you, you will get sued anyway as the owner of the corporation if the corporation gets sued. Just buy the necessary liability insurance and don't worry about it. If you are concerned about what is the best business form to use, get a book and read up on what can be a bit of a complicated subject. If possible, ask your accountant or lawyer. Nolo Press at www.nolo.com has an excellent book & C-D covering this subject and other legal information about running a small business.