Selecting the Right Structure for Your Business Getting

Selecting the Right Structure for Your Business

Getting Started How should you operate and structure your business? It can be difficult, so ask for help. Consult with a CPA to learn: Filing and compliance issues Tax benefits and detriments

Tax and Non-Tax Issues to Consider Ownership and continuity changes Legal liability protection Federal and state income taxes Social Security taxes Other factors

Structuring for Success Sole Proprietorship Single Member Limited Liability Company Partnership – General and Limited Corporation – S or C Limited Liability Company

Sole Proprietorship One-person business Not registered with state as limited liability company or corporation Some states require license or permit Owner is personally liable Simplest for tax purposes Business ceases to exist with death of owner

Single Member LLC One-person business Registered with state as limited liability company Some states require license or permit Owner may not be personally liable Simplest for tax purposes Business ceases to exist with death of owner

Partnership A relationship between two or more persons Not classified as a corporation Agreement addresses potential concerns Hire an attorney to write up the agreement

Partnership (Continued) General Responsible for partnership liabilities, no matter which partner incurred them Limited Only liable to the extent of partnership investment Partnership Agreements should cover: Income and loss allocations The events that trigger a buyout and a buyout price

Corporation Considered separate from owners and managers Independently liable Owner’s personal assets are protected No limit on number of shareholders in C corporation

Corporation (Continued) Small Corporation Creditors may require guarantees C Corporation The company is taxed Personal Service Corporation (PSC) Engaged in performance of personal services S Corporation S status with the IRS under state law

Limited Liability Company (LLC) Taxed as a partnership, but provides members with liability protection like a corporation Only the LLC’s assets are at risk Pass-through entity Income passes through business to LLC members

Limited Liability Company (LLC) (Continued) Operating agreement Determines how income is allocated among members Gives more flexibility than S Corporation File Form 1065 An informational return with the IRS Reports on members’ income tax returns

Tax Considerations Sole Proprietorship Reports on Form Schedule C on federal Form 1040 Partnership Pass-through entity; Form 1065 and Schedule K-1 S Corporation Taxed like a partnership; Form 1120 S and Schedule K-1 C Corporation Two levels of taxation; Form 1120 and tax on dividends, if any, on Form 1040

Compensation and Payroll Taxes Key issue facing small businesses: Wage income vs. self-employment income Sole proprietors may prefer to pay themselves in the form of wages Health care considerations Retirement plan considerations

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