There are several different legal structures in which you can form your business. The four main types are listed here:

Sole proprietor

A sole proprietor is someone who owns an unincorporated business alone.  Basically, you are your business—there is no separate business entity.  You are automatically considered a sole proprietor if you conduct business but don’t register as any other type of business structure. You are personally responsible for all liabilities of your business.

A business run as a sole proprietorship does not pay separate income tax. The income and deductions of the business are reported on a Schedule C, Profit or Loss from Business which is filed with your Form 1040 each year. You will also need to file Schedule SE, Self-Employment Tax. Additionally, you need to pay estimated taxes on a quarterly basis using Form 1040-ES, Estimated Tax for Individuals. Consult with a tax professional to determine the appropriate estimated tax payments.

Partnership

A partnership is an agreement between two or more people to participates in a business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

A partnership must report the business income, expenses, gains, and losses from operations on Form 1065, U.S. Return of Partnership Income, but does not pay income tax. Instead, the profits or losses are passed through to the partners, each of whom includes his or her share on his or her Form 1040. Additionally, each partner needs to file Schedule SE, Self-Employment Tax, and pay quarterly estimated income taxes.

There are two common kinds of partnerships: Limited Partnerships (LP) and Limited Liability Partnerships (LLP). Limited Partnerships have only one general partner with unlimited liability, and all other partners have limited liability. The partners with limited liability also have limited control over the company. Profits are passed through to personal tax returns, and the general partner is the only one who must pay self-employment taxes.

Limited Liability Partnerships are similar to Limited Partnerships but give limited liability to every owner. An LLP protects each partner from debts against the partnership in that they aren’t held responsible for the actions of the other partners.

Limited Liability Company (LLC)

An LLC is a business entity separate from the owners, and the owners usually do not have personal liability in case of bankruptcy or lawsuits.  Owners of an LLC are called members; members of an LLC may be individuals, corporations, or other LLCs. Most states allow “single-member” LLCs, and there is not a maximum number of members.

Depending on the number of members and the business considerations, an LLC can be treated as either a corporation, a partnership, or as part of the LLC’s owners tax return (a disregarded entity). A single-member LLC is treated as a “disregarded entity” unless it files Form 8832 and elects to be treated as a corporation. An LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and elects to be treated as a corporation.

Corporation

A corporation is a separate entity from the owners, who are called shareholders. Corporations provide the strongest protection to its owners from personal liability, but the cost to form and maintain a corporation is higher than other structures.

Any profits of a corporation are taxed separately from the owners. A corporation must file a Form 1120, U.S. Corporation Income Tax Return. Any profits paid to shareholders are called dividends and shareholders must pay income tax on any dividends they take. The corporation does not get a tax deduction when it pays dividends, consequently shareholders face “double taxation.” Additionally, shareholders cannot deduct any losses of the corporation.

S Corporation

An S Corporation is a corporation that elects to pass the business income and deductions through to the shareholders for federal tax purposes. This allows S Corporations to avid the double taxation on corporation income. To qualify for S Corporation status, a corporation must meet the following requirements:

• Be a domestic corporation
• Shareholders cannot be partnerships, corporations or non-resident aliens
• Have no more than 100 shareholders
• Have only one class of stock

Deciding which business structure to use for your company can be confusing. Consult with a trusted business professional if you are not sure of the best structure for you.

Starting a business can be one of the most exciting things you do in your life. You have a great idea and you have figured out a way to make money with it. So let’s get things going!

Fire! Aim! Ready!

Slow down. Some careful thought, foresight, and planning will go a long way to increase your chances of success. A methodical plan of action will help you to fulfill your dream of being your own boss and running a successful business. The steps below are the start to a basic action plan for the beginning stages of your business.

1. Prepare a Business Plan to clarify your marketing, management, and financial plans. While this task may seem unnecessary and even daunting, especially if you have never seen a Business Plan, this one thing alone will do more to help your business succeed than anything else you can do. A well-thought out Business Plan will help you to crystalize your motives for starting this business, who your competitors are and how you will compete with them, and how much money you will need until the business becomes profitable. (The elements of a solid Business Plan will be detailed in my next blog post.)
2. Determine how much capital you need to take you through the first two years of business. Following the steps of a sold Business Plan will help you consider all the different factors in projecting cash needs. Identify your sources of capital, whether they include your own savings, partner investments, or loans.
3. Select a business location. Some businesses can be run from your home or a small office, others might need industrial space, and still others will need a retail-type site. If your business is in the third category, selecting a location is the second most important thing you do. Your location will affect not only the quantity and quality of traffic that passes each day, but different cities have very different taxes, regulations and licensing requirements that should be considered.
4. Select a business structure that best fits your needs by evaluating tax advantages, legal exposure, and ease of compliance. Whether you operate as a Sole Proprietor, a Limited Liability Company, or a Corporation is entirely your choice, but each structure has different filing and tax aspects that need to be considered. You can consult with a general business attorney, a CPA, or a seasoned accountant to help you with this decision.
5. Register your business name or trade name. If you are going to operate as a Sole Proprietor, you should register a DBA (doing business as) with your state. If you plan to operate as an LLC or a corporation, you need to verify that your chosen name is not already taken and then it must be registered with the state. When choosing a name, think about whether you plan to have a website and check to see if the matching domain name is available. You might also need to consider trademark possibilities, in which case you need to check with the U.S. Patent and Trademark website.
6. Register with the IRS to obtain an EIN (employer identification number).
7. If you expect to collect sales tax from customers, you will need to apply for a sales tax permit from your state.
8. If you will have employees, you need to register with your state for income tax withholding.
9. Find out if the city or township in which your business resides requires any kind of business licensing.
10. Open your business bank account. You will need your EIN and a copy of your Articles to do this. When selecting a bank, consider the convenience of branch locations as well as fees and charges assessed to your account.

These steps may seem daunting, but a seasoned business professional can help walk you through these tasks to make sure you start your business the right way.