Common Business Structures

A Sole Proprietorship is a one-person business. There is no paperwork to fill out to accomplish this. The profit or loss from the business is carried to the personal tax return of Sole Proprietor. The Sole Proprietor is liable for all debts and other liabilities of the company. ciudadistrito

A Fictitious Name Registration (DBA = doing business as) is required in most states. You must file your fictitious name registration before starting the operation of your business. In some cases, it must be filed within 30-40 days of your first business transaction. In addition, several states require that you publish your DBA statement in a local newspaper, and then file proof of publication with the proper government office. The purpose of the publication requirement is to ensure the public is informed of new businesses in the area, jensonracing their legal name and ownership.

A Partnership has two or more people involved. The profit or loss is divided between the partners and carries to their personal tax returns. Each partner is personally liable for the debts or other liabilities of the company.

A Corporation is a separate and distinct legal entity. That means that a Corporation can open a bank account, own property, and do business all under its own name. Corporations are managed by a Board of Directors which is responsible for making major business decisions and overseeing the general affairs of the Corporation. Directors are elected by the Shareholders of the Corporation. Officers who run the day to day operations of the Corporation are appointed by the Directors. denbighict

The main advantage of the Corporation is that its owners, known as Stockholders or Shareholders, are not personally liable for any of the debts or liabilities of the Corporation. For example, if a Corporation gets sued or it is forced into bankruptcy, in most cases, the owners will not be required to pay the debt with their own money if the assets of the corporation are not enough to cover the debts. The creditor cannot, in most circumstances, go after the Shareholders, Directors or Officers of the Corporation to recover any loss.

Investors in business often risked everything they had if the new business turned bad. When the company was out of money and didn’t have the cash to pay creditors, the investors had to make up the difference with their own money. With the advent of the Corporation, investors could avoid this type of liability by forming a Corporation and as a result more people are more willing to invest their money in business ventures. The formation of Corporation as a business entity can help reduce your taxes but more importantly you can provide for peace of mind by protecting your personal assets.

There are two types of Corporation. The IRS allows for a Corporation to be taxed either as a C Corporation or as an S Corporation.

A C corporation’s profits are taxed at two levels which is commonly referred to as double taxation. A C Corporation pays the corporate tax on its corporate income then the C Corporation distributes profits as dividends to shareholders who pay income tax on those dividends.

The way to avoid the double taxation of a C corporation is to make a special election with the IRS to be taxed as an S Corporation. This means that your income will be taxed like a partnership or sole proprietor. That way there’s only one level of taxation. Corporate profits and losses are passed through to the owners who pay the taxes on the profits at the individual personal tax rates instead. You can use income shifting to take advantage of lower tax brackets

Let’s look at an example: iislington

For purposes of this example we will assume that ABC Company is a sole proprietorship and has an income of $100,000. As a sole proprietorship the tax rate is 25%. If it were ABC Corporation instead, let’s assume business owner takes $50,000 in salary and leaves $50,000 for profit. The federal corporate tax rate would be (15% of $50,000) The personal tax rate is at (15% of $50,000) as well. This is a distinct advantage of forming a Corporation.

Other Advantages:

Corporations can provide employee benefit packages for your employees. You can lease assets to your Corporation. The business pays a lease fee and can claim rental income and expenses including interest, depreciation, repairs, maintenance, insurance and administrative costs.

In a Corporation there are no restrictions on the amount of capital or the operating losses that a Corporation may carry back or forward to subsequent tax years. A sole proprietor can’t claim a capital loss greater than $3,000 unless he or she is offsetting capital gains.

The money the sole proprietor earns is subject to self-employment taxes. The taxes are currently 13.3% on the first $106,800 of income. In a Corporation only salaries are subject to such taxes, profits are not. This can save you thousands of dollars a year.

Let’s look at another example:

If a sole proprietor earns $80,000; 13.3% tax would have to be paid on the entire $80,000. Let’s assume that the Corporation also earns $80,000 but $35,000 of that amount is paid in salary. $45,000 is deemed his profit in this case his self-employment tax would not be paid on the $45,000 profit. This saves you over $5,000 per year. It’s important to note that you should pay yourself a reasonable salary and take advantage of all the tax benefits that a Corporation offers you. Don’t forget however there are responsibilities of owning a Corporation and the Corporate Book is probably the most important one of them. We will talk about that later on. yorkshiretelegraph

There are differences in each business structure and you should choose the one that best meets your business needs. The biggest difference between a Sole Proprietorship, Partnership or DBA and the Corporation is taxation. You want to weigh all of your strengths and weaknesses before you decide which business structure to use. Remember that a Sole Proprietor or Partner in a business is liable for all the costs of operating the business. This means that they are liable for all business debts too.


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