Where do I start?
Determine the type of business you would like to have. Some individuals choose to keep there business small and personal in which case they would choose a Sole-Proprietorship. In some cases there are two or more individuals wanted to go into business in which case a Partnership may be the best choice. There are even those who would like to keep their personals away from their business which may lead to establishing a Limited Liability Corporation or a Corporation. Last, but not least, if an individual or group decides they would like to create a business only to help a specific case, but are not looking to profit from the business, they may look to start a Not-For-Profit Corporation.
- Sole Proprietorship
Sole-Proprietorship consists of only one individual. A sole-proprietor does not require as much maintenance as some of the other types of companies. The sole-proprietor’s tax obligation is fulfilled on the personal 1040 tax return. The Schedule C is provided for the owner to report business results for the tax year. This Schedule C is attached to the personal tax return. There are other obligations depending on what type of business is being conducted. For instance, a retail business would need to report sales tax to the state in some states, a business with employees would need to report and pay federal employee taxes, as well as unemployment taxes in some states, every quarter, etc.
Partnerships consist of two or more individuals. A tax Form 1065 is necessary for a partnership. This form is used only to report business results for the prior year. A Form K-1 is completed for each partner to file on his personal 1040 tax return. Like the Sole-Proprietorship, there could be other obligations based on the type of products and services offered.
- Limited Liability Corporation
A Limited Liability Corporation, also known as an LLC, can consist of one or more individuals. Each individual is considered a member. If there is only one member the individual can file tax results on Form 1040. If more than one member, Form 1065 must be completed and Form K-1 must accompany the return to report earnings of all members. Different states require other tax forms periodically. For example, Texas requires what is called a Franchise Tax Report. The Franchise Tax Report is due every year regardless of whether the company was profitable or not.
A Corporation can consist of one or more individuals. Each individual is called a shareholder. Form 1120 is used to report tax earnings for a company. A Corporation can also be considered an S-Corporation. The S-Corporation status can only be granted by the Internal Revenue Services. Form 1120S is used in cases where the shareholders have requested S-Corporation status. If for 1120S is used, shareholders of the corporation receive a Form K-1 which is used to report their earnings from the company on there personal tax return which is said to alleviate ‘double taxation’. Like the LLC, different states require different reporting mechanisms.
A Not-For-Profit Corporation can also consist of one or more individuals. Each individual is referred to as a director. Form 990 is used to report the financial position of the organization. Because non-profit organizations are followed closely by the government, there are additional reports necessary for the organization to stay active and clear of federal issues.