When starting a business, for tax purposes there are five things to consider.
1. Entity Type
Choosing your entity type is very important when comes to starting a business. There are four types of entities and each one is taxed differently. You will need a lawyer to form Partnerships, Corporations, and Limited Liability Company.
A. Sole Proprietor
Sole Proprietor are single business owners who report the income and expenses on Schedule C. Any income is taxed at the taxpayer tax rate.
Partnerships are entities or individuals where there are two more owners. You can have a general partnership, a limited partnership, or a joint venture. Limited liabilities, unlike general partners, provide some limit liability protections to the partners. A partnership is formed by a partnership agreement between the two parties. Based upon the partnership agreement, the profit and losses by split between the partnership based on the partnership agreement. The income is taxed at the partner’s tax rate.
The are two types of corporation. The two types of corporations are the S-Corporation (S-Corps) or a C-Corporation. The S-Corporation is regulated under the Subchapter S of the Revenue Corporations and the corporation must file an election to be S-Corporation. The restrictions on S-Corporations (S-Corps) are:
Be a domestic corporation
Have only allowable shareholders
including individuals, certain trust, and estates and
may not include partnerships, corporations or non-resident alien shareholders
Have no more than 100 shareholders
Have one class of stock
Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.
The income from a S-Corporation is pass-through to the owners and is taxed at the taxpayer tax rate.
Corporations are entities formed to serve a purpose. The corporate tax rate is 34%. Dividends are the income passed out to the owners. Unlike S-Corps, there is no limited to number of shareholders or stock classes. Both S-Corps and Corporations are regulated by Secretary of State and State Laws.
Professional Corporation is another type of Corporation. The tax rate is 35%. Doctors, Lawyers, Accountants, etc are some of the professional organizations that can form professional corporations. This corporation type is not used as often as it used to be since the formation of limited liability companies regulations.
D. Limited Liability Company – These are entities that have similar to partnerships but also have elements of corporations. One aspect of the limited liability company is that it provides limited liability to the owners in many tax jurisdictions. Like partnerships, the income is pass-through to the owners and is taxed at taxpayer’s rate. Like partnerships and corporations, limited liability companies are regulated by state laws.
The name of your business is very important. You don’t want to choose a name for your business that trademarked and copyrighted. The name of your business should reflect what you do in your business so that your customers are not confused.
3. Business Registration
Once you have settled on your entity type and your name, it’s time to begin legally forming your business. This begins with registering your business and filing all the paperwork with your State’s Department of Revenue, Secretary of State, Federal Employer Identification Number, Local taxing office. Another aspect of starting a business is employees and how it affects your business. When you fill out the Form SS-4 to apply to request an Employer Identification Number, one of the questions on the form is whether you expect to have employees and when you expect your employees to start.
4. Employees and Payroll Taxes
Having employees in your business means that your business will have additional tax liabilities. The additional liabilities for employees are the Federal and State unemployment taxes along with your share of the employer’s share of the social security and medicare taxes.
5. Business License & Tax
One of the aspects of starting a business is that you need to determine whether you will need a local or state business license, permits or other type of license. Some business licenses are based on flat fee. Other business licenses are based on gross receipts.
Starting a business is a great thing but to do it right, you need to decide on your business structure, business name, employees, business license. Once you decide on the business structure and name, the only thing you’ll start your business is the local and state registration and licensing requirements.
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