In response to your request for business structure advice, I believe you will find the following information extremely helpful to lead you to your decision. First, you must know which your business structure options are, these include: sole proprietorship, partnership and corporation. A partnership could be general or limited and a corporation could be a general or a subchapter S-corporation. Each of these options has their advantages, disadvantages and differences regarding tax consequences. I strongly suggest you choose the one that best fits your products’ or services’ needs.
A sole proprietorship is the best business structure for those starting out with limited funds and wanting complete authority over all business decisions. If you decide to become a sole proprietor, you would have complete authority over all decisions regarding your business. Unfortunately, you would also be personally and completely liable for any expenses and debts your business incurs. Because of this, you, the owner, must keep sufficient records to fulfill with federal tax requirements regarding the business. Your net business income is joined with your other income and taxed at individual rates on your personal tax return. Sole proprietors must also pay self-employment tax.
Another option is to form a partnership, you must indeed have a partner or partners as the owners of the business. Advantages to forming a partnership is that all partners can contribute ideas, skills, and financially provide and invest more into the business. Similar to a sole proprietorship, all owners are responsible for the debts the business sustains. Each partner must report their share of the business’ net profit or loss on his personal tax return, even if a distribution is not made. A general partnership implies that debts and expenses are equally divided between the owners and each must pay self-employment tax on their net earnings from the partnership.
A limited partnership indicates that each partner will have a portion of personal liability proportionate to their capital investment. In this case all limited partners are subject to self-employment tax only on guaranteed payments. It is of extreme importance that if you form a partnership, you and all other partners seek legal counsel to clarify roles and responsibilities.
And finally, you could choose to form a corporation. It is considered a separate legal entity so if you decide to start a general corporation, you should know that all stockholders are safe from any business predators and that your personal assets would be separated from the corporation’s liabilities. With a corporation, the income earned by the business is taxed at the corporate level using corporate tax rates. If a shareholder is also an employee, the employee will pay income tax on his/her wages, and the corporation as well as pay a portion of the social security and Medicare taxes and the corporation can deduct its half. A corporate shareholder (not being an employee) pays income tax for only dividends received, which could then be subject to
dividends-received deductions. If you opt for a Subchapter S. corporation, then you will have a special IRS tax status.
This type of business structure is mostly utilized by business owners who prefer to be taxed as sole proprietors or partners. Each shareholders is taxed on their share of corporate income, even if it was not distributed. Advantages to this structure are tax savings, business expense tax credits, and an independent life separate from shareholders. A disadvantage is that the corporation operates under strict operational guidelines and shareholder compensation BUSINESS STRUCTURE ADVICE 3
requirements. Obviously this is the most complex business structure and the process of starting a corporation is more complicated, but know that there are plenty of attorneys with experience to help with necessary paperwork. Take into consideration every detail of these options, I wish you the best of luck in your endeavors.
Respectfully, Adriana Tovar
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Internal Revenue Services. (2012, August 17). Choosing a Business Structure. Retrieved December 15, 2014, from http://www.irs.gov/uac/Choosing-a-Business- Structure (Video) (2011). Corporate Business Structures. Planning Your Business: Research, Goals, and Business Plans. [Films on Demand]. Retrieved on December 8, 2014 from http://digital. films .com/PortalViewVideo.aspx?xtid=42248&loid=116024# (Video) (2011). Your Business Structure. Planning Your Business: Research, Goals, and Business Plans. [Films on Demand]. Retrieved on December 8, 2014 from http://digital. films .com/PortalViewVideo.aspx?xtid=42248&loid=116024#