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Setting up a Business Structure - Tax Considerations
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Setting up a Business Structure - Tax Considerations
When you are starting a business, you should consider setting up a business structure, like a sole proprietorship, partnership, limited liability company, corporation, or S corporation. You should choose the business structure that best suits your needs, your goals, and your current resources. Not every structure will be right for you, and each has its own strengths and weaknesses, as well as tax implications. To help you make your decision, here are some basic facts about five major types of business structure, their systems of ownership and their tax implications.
Sole Proprietorship Most small businesses fall under this category, which is the easiest to set up due to its simple and informal structure. One person owns all the assets and profits of the business, but also owns all the responsibility of its liability and debt. Legally, the owner and the business are one and the same. The owner can also report losses and profits on his or her personal income tax return. Set up your Sole Proprietorship now with RocketLawyer.com Partnership A Partnership is like a 'sole proprietorship', except that two or more people share ownership of a business, as well its assets, profits, liability and debt. Again, the business and its owners are indistinguishable in eyes of the law. Partners can split profits and liabilities according to a Partnership Agreement. Partnerships don't pay taxes. Instead,they file informational returns, and each partner reports their share of profits and losses. There are different types of partnership agreements as well:
Write your Partnership Agreement now with RocketLawyer.com Corporation A Corporation is a unique entity under the law: it is separate from the identity of its owners, and is treated as a person, as it can be taxed, sued, and can enter contracted agreements. Shareholders (i.e., owners) have limited liability for debts and judgments, but officers can be held responsible for their own actions. While corporations do have some special rights (eg, they can raise funding through stocks), they are also more expensive to set up, they are more heavily monitored and regulated, and they pay more taxes. Corporations have a complex structure and are costly to start up, so they require the help of a qualified attorney. Incorporate your business now with RocketLawyer.com Subchapter-S Corporation Corporations can choose this tax policy, which enables a shareholder to treat profits or earnings as distributions and pass them directly to a personal tax return. If the shareholder works for the company and makes a profit, however, he or she must pay his or her own wages. Basically, the Subchapter S helps corporations avoid double taxation. Set up your Subchapter-S Corporation now with RocketLawyer.com Limited Liability Company An LLC is a hybrid business structure and is allowed in most states. It is designed to offer the limited liability of a corporation with a partnership's tax efficiency and flexibility of operations. The duration of a Limited Liability Company is usually established up front, but can always be extended. To become an LLC, you must not have more than two of the four characteristics of a corporation:
Set up your Limited Liability Company now with RocketLawyer.com. Incorporate your Business for Free
Laws on this topic may vary from state to state.
This content is not meant to provide you with complete information and it is not intended to be legal or tax advice. It is recommended that you consult with your own attorney, accountant or other advisor regarding your specific situation.
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