Type of Business

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Starting and Forming A Small Business- ‘Do It Right’

When you are planning to set up a business, whether this is a small home business or you plan a massive launch, you need to be aware and informed about the various types of business in the USA as each one of the structures will mean different tax implications and legal bindings. The most common structures are briefly described here:

1. Sole Proprietorship – as the name indicates, in sole proprietorship, you are the sole and only owner. The main advantage here is that you are taxed one both as a business and as an individual. You need to estimated your taxes and report your income and expenditure through Form 1040 and Schedule C .

Other advantages you will enjoy are that you enjoy full control over your business, you will find it easy to fill your taxes, and the costs are minimal for setting up the business. The disadvantages are unlimited personal liability, full pressure on you, and difficulty in raising the capital.

2. Partnership – under this category there are three major sub-categories, i.e. joint ventures, limited partnerships, and general partnerships. In partnerships the IRS requires that the business is registered both with the federal and state governments. In addition to the standard tax return requirements, i.e. excise taxes, employment taxes and annual return of income, a partnership would impose the following additional taxes on the partners – income tax, estimated tax and self-employed tax.

Taxes must be filed in Schedule K-1

3. Corporations – to establish a corporation you need to have it registered with your state business registration office and obtain all necessary licenses and permits to run your business. Use this tool as a reference point. You must also register with the IRS and local revenue agency and receive a TIN (tax id no.).

Corporations are also known as C-Corporations and returns are filed using Form 1120 or 1120A

4. LLC – LLC is the short form of “Limited Liability Company” and such a company can have one member or more individuals as owners. The difference between an LLC and corporation is that the taxes of an LLC are filed through their personal tax returns while for corporates these are filed as a business entity, separate from the individual members that own it.
As a single member LLC you may file your taxes using Form 1040, just as you would if you were a sole proprietor. With 2 or more partners you need to file using Form 1065. If designated as a corporation, the taxes may be filed using Form 1120.
For additional benefits you may consider giving your LLC company the status of S-Corporation; in that case the taxes would be filed using Form 2553.

5. S-corporation – an S-Corporation is considered as a separated business entity from its owners/ partners. The advantage with this structure is that it provides the minimum personal liability. At the same time, taxes are routed through your personal returns and hence, the business is not taxed. The shareholders are taxed instead. Check whether you qualify under IRS rules to form an S-corporation.

As you can observe, each business structure is taxed differently. It is very important therefore to hire and consult a tax professional when doing this so it is done right and you enjoy maximum benefits.