Business Structures

You've decided to start your own business. This is great! What should be the first step? You need to decide what type of business structure you need. It is an important decision, as it may affect your business plans in future. Here is a short overview.

Sole Proprietorship

Tax form: schedule C (part of a personal tax return, form 1040), due by April 15th

Liabilities: owner’s unlimited liability

Key features:

- Not a separate entity from its owner.

- EIN is not required.

- Easy and least expensive to open: once you start your business activity, you are automatically classified as a sole proprietor, if you do not register another type of business.

- Can have trade names.

- Does not require formal payroll for owners.

- Owners need to be on track of self-employment taxes they will owe and prepay them during the year.

- Ownership cannot be transferred if you decide to stop running the business.

- Perfect type of business for low-risk activities.

Corporations type C

Tax form: form 1120, due by April 15th

Liabilities: limited liability for owners, corporations can be held liable themselves

Key features:

- a separate entity from its owners

- can make profits and be taxed.

- EIN is required.

- Article of Incorporation is required.

- Double taxation: income is taxed on the corporation level, then dividends are taxed on thе owners’ level.

- Owners are required to take reasonable compensation (to be on payroll).

- Corporations can deduct the cost of benefits it provides to officers and employees.

- The corporation does not dissolve when ownership changes.

- Generally, this is a structure for large businesses, it requires compliance with a lot of regulations and tax requirements, thorough record-keeping.

Corporations type S

Tax form: form 1120S – a pass-through entity that passes income on to its owners, due by March 15th.

Liabilities: limited liability for owners

Key features:

- a separate entity from its owners.

- EIN is required.

- Article of Incorporation is required.

- Ownership restrictions (for example, for nonresident aliens).

- You need to file a separate form (2553) to request this status for your business.

- Owners are required to take reasonable compensation (to be on payroll).

- S-corporations have some useful options to keep more of your tax money (health insurance deduction for 2% shareholder, for example)

- The corporation does not dissolve when ownership changes.

Partnerships

Tax form: Form 1065 – a pass-through entity that passes income on to its owners, due by March 15th.

Liabilities: In general partnerships, general partners can be held liable for the partnership’s debts; it is applicable even to limited liability partnerships in some states

Key features:

- a separate entity from its owners.

- EIN is required.

- Partnership agreement is required.

- General partners need to be on track of self-employment taxes they will owe and prepay them during the year.

- Limited liabilities partnerships are also possible and usually a good fit for professional groups with multiple owners.

Limited Liability Company

- a hybrid business structure separated from its owners.

- it can have any tax structure but automatically is classified as a sole-proprietorship (if one owner) or a partnership (if 2 or more owners).

- you need to file specific forms to elect LLC to be taxed as S- Corporation (form 2553) or C-Corporation (form 8832).

- This form provides advantages of both corporations and partnerships.

- EIN is not always required.

- Certificate of formation is required.

- It is a good choice for startups, small and medium-sized businesses, when owners do need to protect their personal assets.