Tips to succeed in business

Different types of Business Organizations forms

Your first step towards success is to decide which business organization form is for your business.  Please consult your attorney and/or CPA before deciding which business organization form best suits your business needs.  This is not a legal advice

  • Sole Proprietorship: A sole proprietorship is one person alone. The owner will have unlimited liability for all debts of the business, and the income or loss from the business will be reported on their personal income tax return along with all other income and expense they normally report (although it will be on a separate schedule). Although proprietorship avoids the expense of forming a partnership or corporation, many start businesses this way because they don’t know better, or they are not familiar with the other forms of Company organizations
  • General Partnership: In a general partnership, each of the two or more partners will have unlimited liability for the debts of the business. The income and expense is reported on a separate return for tax purposes, but each partner then reports his or her pro-rata share of the profit or loss from the business as one line on his personal tax return.
  • Limited Partnership: With a limited partnership, each of the general partners has unlimited liability for the debts of the partnership, but the limited partner’s exposure to the debts of the partnership is limited to the contribution each has made to the partnership. With certain minor exceptions, the reporting for tax purposes is the same as for a general partnership.
  •  Corporations: Incorporating a business is a great way to protect your personal assets from company liabilities such as creditors or lawsuits The corporate business structure also saves you money in taxes, provides greater business flexibility and makes it easier to seek outside investment.  Corporations are required to perform certain formalities such as holding annual meetings and keeping detailed corporate records (minutes):

·        “C Corporation”: A corporation provides limited liability for the investors. None of the shareholders in a corporation is obligated for the debts of the corporation; creditors can look only to the corporation’s assets for payment. The corporation files its own tax return and pays taxes on its income. If the corporation distributes some of its earnings in the form of dividends, it does not deduct the dividend in computing its taxes, but the shareholder recipients must pay taxes on those dividends even though the corporation has paid taxes on its earnings, which some people refer to as “Double taxing”. A corporation has some tax benefits such as deductibility of health insurance premiums.   Very accurate financial records have to be maintained for taxes and for liability issues.  If the financial records are not clearly separated from the personal financial records, in case of a lawsuit the judge might issue judgment against the personal properties of the owners/ share holders.  Only cash payment is allowed for shares in the Corporations

·        “S” Corporation: A corporation that has made an election to be an “S” Corporation for federal income tax purposes is treated as a partnership for tax purposes, although it is treated as a regular corporation for other purposes.   Same rules of financial records maintaining apply.

  • Limited Liability (LLC): A limited liability company provides limited liability for all of its members, as a corporation, but with fewer of the corporate formalities. They typically are not required to hold formal meetings or keep detailed corporate minutes. Can be treated as a partnership for federal income tax purposes, LLCs also offer great tax flexibility. Members can choose to be taxed as either a traditional corporation or as a “pass-through” entity. State laws may differ as to whether it is treated as a partnership or a corporation for state income tax purposes. It can be managed by all of the members or can have centralized management in one or more of the members.  The shares can be dealt with in other forms than cash as services rendered etc…

C Corporation

S Corporation

LLC

Personal liability protection for owners

Personal liability protection for owners

Personal liability protection for owners

Taxed at corporate and individual level

Income/loss passed directly to shareholders

Income/loss passed directly to shareholders

Formal meetings and corporate minutes

Formal meetings and corporate minutes

Option to be taxed as Corporation or LLC

Annual state reports

Annual state reports

Annual state reports

No membership restrictions

Membership restricted to 100 shareholders

No membership restrictions

Cheers,

Sahar Andrade

www.saharconsulting.com

 

 

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