Thursday, August 22, 2013

When beginning a business, you must decide what form of business entity to establish. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation.
Sole proprietors are unincorporated businesses. A sole proprietor owns and operates the business by himself or herself.  There are no forms you need to fill out to start this type of business. Business income and expenses are reported on your Form 1040 Schedule C.
Partnerships are unincorporated businesses. Like corporations, partnerships are separate entities from the shareholders. Unlike corporations, partnerships must have at least one General Partner who assumes unlimited liability for the business. Partnerships must have at least two partners. 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 income or loss on his or her tax return.
C-Corporations are incorporated businesses. The shareholders of C-corporations have limited liability protection, and corporations have full discretion over the amount of profits they can distribute or retain. Corporations must have at least one shareholder. The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.
S-Corporations are a type of corporation. The shareholders of S-corporations have limited liability protection, and the corporations has full discretion over the amount of profits they can distribute or retain. An S-corporation must have at least one shareholder, and cannot have more than 100 shareholders. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income, but S corporations are responsible for tax on certain built-in gains and passive income.
If you are interested in starting a business, contact us and we will help you decide what business form is right for you.
 

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