Tuesday, January 12, 2010

Business Structures

When you decide to become a business owner you have to decide what type of business you will have. There are a few choices to choose from; each business type requires a different tax filing schedule:
•Sole Proprietor (1040 Schedule C)
•Corporation (1120)
•Partnership (1065)
•S-Corporation (1120S)
•Trust (1041)
•Non-profit organization (990)
•Limited Liability or LLC

Sole proprietors are unincorporated businesses. A sole proprietor is someone who owns a business by themselves.

Partnerships are unincorporated businesses. Partnerships are owned by 2 or more individuals.

In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions.

S-Corporations have features similar to a partnership. An S-corporation must have at least one shareholder, and cannot have more than 100 shareholders. If any shareholder provides services to the business, the S-Corp must pay that shareholder a reasonable salary. This salary is a separate payment from distributions of profits or losses.

Trusts are usually formed upon the death of an individual and are designed to provide continuity of the investments and business activities of the deceased individual. We will not discuss trusts further.

Nonprofits are corporations formed for a charitable, civic, or artistic purpose. Nonprofits are generally exempt from federal and state taxation on their income, and so they are often called "exempt organizations."

A Limited Liability Company (LLC) is a 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. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

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