How to Start A Limited Liability Corporation

A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.

Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation. In a pass through entity, the profits or losses of the business pass directly through to the owners' personal income tax returns, on their Form 1040. The LLC files a Form 1065, and then lists each member's taxable profit on Form K-1. In other words, the LLC itself does not file taxes. However, if the LLC has just one owner, it will be taxed as a sole proprietorship.

Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.

Additionally, there is a managing member, who also enjoys the rewards of limited liability and is typically the person responsible for managing the business. (However, if the LLC has just one owner, it will be taxed as a sole prprietorship.)

Advantages

• Owners have limited personal liability for business debts even if they participate in management.
  


• Profit and loss can be allocated differently than ownership interests.
  


• IRS rules now allow Limited Liability Corporation (LLC) to choose between being taxed as partnership or corporation.

Disadvantges

• More expensive to create than partnership or sole proprietorship
  


• State laws for creating Limited Liability Corporation (LLC) may not reflect latest federal tax changes

For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies (PDF).

How To Start A Business as a "S" Corporation

Suppose you can answer every personal tax problem that comes your way. Your friends and family call you to prepare their income tax returns because they are unhappy with their present tax return preparer. Word gets around that you are extremely good at taxes and soon their friends start calling you, and they’re willing to pay for your services. You figure if you do this a few evenings a`week, you could make a nice profit. After, doing some research into the different types of business structures, you decide that an "S" corporation would be the best type of business structure to operate under. The first reason why you chose a corporation is that you want protect your home, bank accounts and other personal assets against lawsuits made against the business. The second reason is that you don't want to be taxed at the corporate level and the shareholder level.

An S corporation is a regular corporation that has elected "S corporation" tax status. Forming an S corporation lets you enjoy the limited liability of a corporate shareholder but pay income taxes as if you were a sole proprietor or a partner.

An S corporation is a pass through entity. In a pass through entity all business profits "pass through" to the owners, who report them on their personal tax returns in the same matter as in sole proprietorships, partnerships, and LLCs. The corporation itself does not pay any income tax, although an S corporation with more than one owner must file an informational tax return, like a partnership or LLC, to report each shareholder's portion of the corporate income.

In order to create an S corporation, you must first create a regular corporation by filing articles of incorporation with your secretary of state's office. All shareholders must sign and file IRS Form 2553 in order to operate as a "S" corporation. The election should be made by

• No more than two months and 15 days after the beginning of the tax year the election is to take effect, or
• any time during the tax year preceding the tax year it is to take effect.

To qualify for S corporation status, the corporation must meet the following requirements:

• Be a domestic corporation
• Have only allowable shareholders including individuals, certain trust, and estates and
  may not include partnerships, corporations or non-resident alien shareholders
• Have no more than 100 shareholders
• Have one class of stock
• Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.

If anyone of these requirements are not met the "S" corporation status will be revoked by the IRS. For example, if your company was operating as an "S" corp and added 10 new shareholders so that the total amount of shareholders now exceed 100, then the "S" corporation status can be revoked.

An "S" corporation owners are called shareholders, and each shareholder includes his or her share of the corporation's income or loss on his or her tax return using Form 1040 and Schedule E. If you do business as a "S" corporation, the corporation will need to complete Form 1120S for and a 1120 Schedule K-1 for each shareholder. The corporation will be liable for paying employment taxes if it hires employees, and certain excise taxes. Since the corporation is a seperate legal entity, the shareholder(owner) does not have to pay self employment taxes. Some of the forms you will need for employment taxes are Form 940, Form 941, Form 943, and Form 8109-B.

The advantages of doing business as a "S" corporation are:

• Corporate losses can be passed through to the shareholders, and as a shareholder, you may be able to take the loss against income that appears on your personal return.
• You can have the protection of limited personal liability without having to pay corporate taxes.
• You can minimize self-employment tax and FICA tax.

The disadvantages of doing business as a "S" corporation are:

• Numerous regulations and requirements must be upheld by an S Corporation.
• Like a C Corporation, it can be costly to set up and follow corporate formalities.
• Close scrutiny by the IRS of shareholder-employees, who must receive reasonable compensation.

How To Start A Business: Partnerships

A partnership is a for-profit business association of two or more persons. Partners can include individuals, groups of individuals, companies, and corporations. Partnerships are highly adaptable in form and vary in complexity. Each partner shares directly in the organization's profits and shares control of the business operation. The consequence of this profit sharing is that partners are jointly and independently liable for the partnership's debts.


The business component of a partnership is defined broadly by state laws in accordance to the Uniform Partnership Act. These statutes establish the basic legal rules that apply to partnerships and will control many aspects of your partnership's life unless you set out different rules in a written partnership agreement. Don't be tempted to leave the terms of your partnership up to these state laws because they were designed as one-size-fits-all fallback rules in the absence of a written partnership agreement. If you are going to create a partnership agreement , some of the items that should be included in your agreement are:

• Name of partnership.
• Contributions to the partnership.
• Allocation of profits, losses, and withdraws.
• Partner's agency authority.
• Partnership decision making.
• Management duties.
• Admitting new partners
• Withdrawal or death of partners

A partnership must file an annual information return using Form 1065 to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return using Form 1040 and Schedule E. If you do business as a partnership, the the partnership will be liable for paying employment taxes if you hire employees, and certain excise taxes. Some of the forms you will need for employment taxes are Form 940, Form 941 and Form 8109-B.

For more information see Publication 541 or consult your accountant or tax attorney.

Partners are not employees and should not be issued a Form W-2's. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions. As a partner, some of the taxes you will be responsible for paying are self employment taxes and estimated taxes.

The advantages of operating a business as a partnership are:

• You have a shared financial commitment.
• You can pool together resources, expertise and strengths.
• There are limited start up costs.

The disadvantages of operating a business as a partnership are:

• Partners are personally liable business debts and liabilities.
• There may be unequal commitment in terms of time and finances.
• There may be personal disputes with the partners.
• Partners may have different visions or goals for the business.

Business Organization: Sole Proprietor

As the the economy continues to shed jobs, some unemployed people are turning this opportunity into a chance to start their own businesses and turn their passions into money making endeavour. In this series on "How To Start Your Own Business" I will examine the different types of business structures, the types of forms you will need to file for federal tax purposes, and the advantages and disadvantages of each business structure.

The first type of business structure I will discuss is the sole proprietorship. The sole proprietorship is the most common type of business structure chosen for small businesses. A sole proprietor is someone who owns an unincorporated business by himself or herself. The owner or proprietor is responsible for all business transactions and is personally liable for all debts and liabilities incurred by the company. The owner pays taxes on income from the business as part of his or her personal income tax. Normally this is done by filing Form 1040 and either a Schedule C or a Schedule CEZ. Sole proprietors need to comply with licensing requirements in the states in which they're doing business, as well as local regulations and zoning ordinances. Some of the other types of federal taxes you may be responsible for as a sole proprietor are self employment taxes, excise tax, and various other taxes if you hire employees.

Self Employment Tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. You will file your self employment taxes using Schedule SE along with your 1040 form.

Employment Taxes are paid only if you hire employees to work for your business. Some of the taxes you will be required to pay are:

• Social Security and Medicare taxes.
• Federal Income Witholding Taxes
• Federal Unemployment (FUTA) Taxes.

For more information on employment taxes see Publication 15.

Excise Taxes are paid if you are involved in

• Manufacture or sell certain products.
• Operate certain kinds of businesses.
• Use various kinds of equipment, facilities, or products.
• Receive payment for certain services.

Advantages of a Sole Proprietorship

• A sole proprietor has complete control and decision-making power over the business.
• Sale or transfer can take place at the discretion of the sole proprietor.
• No corporate tax payments.
• It can also be less costly to start a business as a sole proprietor, which is attractive to many new business owners who often find it difficult to attract investors.
• Minimal legal costs to forming a sole proprietorship.
• Few formal business requirements.

Disadvantages of a Sole Proprietorship

• The sole proprietor of the business can be held personally liable for the debts and obligations of the business. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company.
• All responsibilities and business decisions fall on the shoulders of the sole proprietor.
• Investors won’t usually invest in sole proprietorships.

Tips On How To Start A Business

For a variety reasons, including economic, social, and technological, starting a new business is more popular than ever with entrepreneurs in the USA. Many successful corporations began as home businesses and were able to transform themselves into major corporations as they increased sales and expanded their operations. As a result of technological advances, anyone with a cell phone, a computer with a high speed connection, and an idea can start and run a successful business.

If you are starting a new business this summer, you should be aware of federal tax responsibilities. Here are the top seven things you should know if you are planning to open a new business this year.

1. As a small business owner, you must decide what type of business organization you are going to use. The type of business organization you choose will determine the type of tax forms you will using in order to file taxes. The most common types of business entities are sole proprietorships, partnerships, limited liability corporations(LLC), C corporations and S corporations.


2. The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.


3. An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. You can apply for an EIN by using Form SS-4 or you can file online at http://www.irs.gov/, or you can aply by phone. This EIN is your permanent number and can be used immediately for most of your business needs, including opening a bank account, applying for business licenses, and filing a tax return by mail. However, no matter how you apply (phone, fax, mail, or online), it will take up to two weeks before your EIN becomes part of the IRS' permanent records. You must wait until this occurs before you can file an electronic return, make an electronic payment, or pass an IRS Taxpayer Identification Number matching program.


4. Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.


5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used. A calendar year ends on December 31 while a fiscal year ends on a date of your choosing. Governmental organizations normally use a fiscal year that ends on June 30 and begins on July 1.


6. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.


7. Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.

Limited Liability Company LLC

A limited liability company, or LLC, can be best described as having the characteristics of a partnership and a corporation. An LLC gives a business the good parts of a corporation without all of the corporate protocols. The multiple owners who are called members of an LLC are looked upon as a partnership for tax purposes.

The LLC is a pass-thru tax structure, so income taxes are paid by its owners, so, unlike a corporation, the LLC itself never pays income tax. As a result, LLC does not suffer from the double-taxation problem that a corporate structure does and the tax burden is passed on directly to the owners. However, an LLC is still obligated to pay state (if applicable) and federal payroll taxes.

At the time of forming a LLC, you choose how to handle income taxes. You can be taxed like a sole proprietor where you are taxed directly, a C corporation where there is double taxation, or an S corporation which is another type of pass thru entity but has the same protections as a C corporation. The choice is yours.

Assuming that the LLC is properly set up, and you completely separate business and personal activities, the owners are afforded personal liability protection. This is a big reason why people choose to form an LLC instead of operating as a sole proprietor. You should also consider that a business generally earns more admiration when it has a formal business structure, such as an LLC.

In the US, the limited liability company is a fairly new business structure. As a matter of fact, as early as 1986, you could create a limited liability company in only two states. Today, every state recognizes this business structure. A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.