What you need to know before you open a business

I have been in the services for CPA business for over 30 years, and every time I get together with somebody who knows what I do, I get asked the same question.

What kind of business do you think I need to open?

It is a remarkable question and the one that has numerous possibilities.

Do I need to open a corporation? Should I just file as self employed? What are the rewards and disadvantages and how much will all this cost me?

The only answer I can give is: It all depends on your requirements. Will you use a skilled accountant/attorney to open your business? If the answer is YES, it will cost extra.

Can you go online and take care of it all yourself? If YES, will you use professional tax software to prepare your tax returns?

I decided to break it apart and will give you a opportunity to decide for yourself.

Lets take it one at a time.

Sole Proprietorship

Example: You do a number of contracting work and at the end of the year the company or companies will mail you a form 1099. This form will comprise of all the payments made to you by that company.

In this case you are self employed and accountable for all the taxes including Federal, State, Local & Self Employment tax.

Advantages:

You don’t need to use up money for accountant or attorney charges to open any kind of entity, i.e. corporation, LLC, etc.

You have total control over your obligations, i.e. Tax payments, reporting income.

You will use Form 1040, Schedule C to report your income and operating expense. There is no need to file quarterly tax returns, unless you want to make quarterly estimated payments, you report your income once a year.

Business terminates its existence when you decide to stop working or incase of your demise.

Disadvantages:

Personal liability. You are fully responsible & liable in case of a lawsuit against you.

Limited Liability Company (LLC)

Example 1: You are a landscaper and you work for yourself. There is a likelihood and possibility of injury and you need to open a Limited Liability Company.

Example 2: You and a buddy or a group of acquaintances decided to go into a business together and become partners in this venture.

In this case Partnership is your best answer.

Advantages:

You or your partners are not typically held liable in the event of a lawsuit.

Members or individual partners make a decision on who will obtain responsibility of the administrative duties.

Profits generally disbursed based on the percentage of ownership, which is usually predetermined based on the amount of funds contributed during the creation of the partnership by an individual partner.

There is no double taxation; each partner’s income is accountable for self-employment tax.

If there is only 1 member in the LLC, income and expenses are being reported on Form 1040, Schedule C. If there are multiple partners, you will need to file Form 1065 and each partner will receive a Schedule K-1 showing his or her income.

There is a chance of transferring interest from one partner to another or interest in the partnership could be sold to an outside party if the other partners agree.

Disadvantages:

There is a cost connected with formation of the partnership. There might be accountant/attorneys fees incurred. 

In case of a partnership, there are state & local taxes and fees. 

C Corporation

Example: You decided to open a business with inadequate capital and you found a few men & women who are prepared to back you and provide capital for your business. In this case they are acquiring shares of your business. Those shares could be sold to an outside party without consideration of other shareholders. You will have employees, payroll, and sales tax.

Advantages:

You will need limited amount of capital that you need to contribute.

Shareholders are not typically held responsible in case of a lawsuit.

Income will be distributed to shareholders as dividends and not taxed at corporate level.

Form 1120 is used to report yearly.

Shares of stock are easily transferred.

Shares of stock could be sold to raise money.

Life of the company can extend past death or sale of your shares.

Disadvantages:

There is an expense associated with formation of the corporation. There might be accountant/attorneys fees incurred.

Shareholders elect a board of directors/officers, whose duties will be to run the company.

There are annual meetings and report filing requirements.

Quarterly filing of payroll taxes, sales taxes.

Double taxation is possible.

Taxed at corporate rate.

There are state & local taxes and fees associated with 1120 C Corporation.

Must have yearly meetings, board of directors meetings, corporate minutes must be taken during those meetings, and stockholders meetings.

S Corporation

Example: Example: You decided to open a business with inadequate capital and you found a few people who are prepared to back you and invest capital into your business. In this case they are purchasing shares of your business. Those shares could be sold to an outside party without consideration of other shareholders. You will have employees, payroll, and sales tax.

Advantages:

You need limited amount of funds that you need to contribute.

Shareholders are not usually held liable in case of a lawsuit.

Each shareholder’s income is dispersed at the end of the year and not subject to employment tax.

Form 1120S is used to report yearly.

Shares of stock could be transferred, but you must observe IRS regulations on who can own stock and operating agreement of the company.

Shares of stock could be sold to increase capital.

Life of the company can extend past death or sale of your shares.

Disadvantages:

There is a cost related to formation of the corporation. There might be accountant/attorneys fees involved.

Shareholders choose a board of directors/officers, who will run the company.

There are annual meetings and report filing requirements.

Quarterly filing of payroll taxes, sales taxes.

There is no tax on the corporate level. All earnings are being passed through to the shareholders.

C Corporations can’t acquire stock in the S Corporation.

There are state & local taxes and fees associated with 1120S Corporation.

Must have annual meetings, board of directors meetings, corporate minutes must be taken through those meetings, and stockholders meetings.

Related articles

• Limited Liability Company Taxes (turbotax.intuit.com)
• Limited Liability Company (turbotax.intuit.com)
• LLC Tax Filing Rules (turbotax.intuit.com)
• When and How to Incorporate (turbotax.intuit.com)
• Accountant Describes Various Kinds of Companies (dohertyassoc.com)

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