By: Terri Fisher

Are you thinking of, or ready to, start your own business?  If so, how to establish your legal business entity is one of the first decisions you will need to make.  You can set up your business as a Sole Proprietorship, C-Corporation, S-Corporation, LLP (Limited Liability Partnership), or LLC (Limited Liability Company). Whoa!

Which type is best for you?  Let’s look at the basics:

C-Corporation
Small businesses typically decide against a C-Corporation, because C-Corps pay two levels of federal income tax. The C-Corporation pays tax when it files its federal tax return and a second layer of tax is imposed when the C-Corporation’s profits are distributed to the shareholders as dividends. Those dividends are reported and taxed on the individual’s federal tax return. Together, these two levels of taxes are referred to as “double taxation.” (State income taxes may also apply to both C-Corporation profits and distributed dividends.)  A C-Corporation is far from ideal for small businesses.

Sole Proprietor
Doing business as a sole proprietor eliminates the double taxation. There are no corporate taxes to pay, and you only pay individual taxes on your net profits. However, as a sole proprietor, you lack the legal protection that corporate status gives you. In a sole proprietorship the business and the owner are considered one entity. Therefore, sole proprietors do not enjoy the limited liability that owners of corporations do.

S-Corporation
The S Corporation has been, for many years, the standard form of organization for conducting a small business. An S-Corporation’s shareholders have the same limited liability as a C-Corporation but the taxable income is passed through to the shareholders.  This results in taxes being paid at an individual tax rate rather than the higher corporate rate.

Bear in mind that the “S” status of the Corporation only impacts taxes. Shareholders of S Corporations have all of the same legal protections as those in C Corporations, but they also have all of the same legal requirements.

Limited Liability Company (LLC) / Limited Liability Partnership (LLP)
LLPs and LLCs are similar in many ways. One key difference is that LLPs must be owned by more than one individual (the “P” in LLP stands for partnership).

LLCs are relatively new and have quickly become a popular form of business entity across the country. By default, LLCs with more than one owner (member) are taxed as partnerships, while single-member LLCs are taxed as sole proprietorships. Hence, as with S-Corporations, with LLCs you pay taxes at the individual level. Both offer protection from unlimited liability.  However, unlike S-Corporations, you will pay employment taxes (Social Security and Medicare) on 100% of the business’s net profits. In an S-Corporation you only pay these taxes on your salary; it must be a “reasonable” salary, though, as determined by the IRS.

Establishing Your Business
Establishing a corporation is relatively simple and inexpensive. An attorney or even you yourself can form a corporation by completing a series of “boilerplate” documents. These forms require you to complete the following information: who will own the business, the business’s activity and address, and other miscellaneous details. Aside from being registered as an “Inc., Co. or Corp.”, a corporation can also be registered as P.C. (Professional Corporation). This designation is for professionals who choose to operate in corporate form and is popular with doctors, lawyers, and accountants.  To establish a corporation as an S-Corporation requires the filing of form 2553 with the Internal Revenue Service.

An LLC requires a bit more work to get started. Articles of Organization need to be filed with the state and an Operating Ageement (like a Partnership Agreement) should be drafted by a lawyer. In addition, business information about the LLC must be placed in a published ad to give notice to the public that the company is being started. An LLC can choose to be registered as a P.L.L.C. (Professional Limited Liability Company) when its owners are licensed by the state to engage in a professional practice — doctors, lawyers, accountants, etc.

A Sole Proprietorship requires little setup.  There are no documents to file and while it is advisable to acquire a Federal ID number, for security purposes, it isn’t required.  You can operate a sole proprietorship using your social security number.  Registering your “trading as” name, if you will use one, is required also.

You can find additional information on the IRS website:
www.irs.gov/businesses/small/article/0,,id=98359,00.html

When choosing the type of legal entity for your business you need to consider many things. What may be appropriate for one set of circumstances may not be for another. Every business is different, and every owner has different needs and expectations.

There are additionally other complex factors, beyond the scope of this article, which may influence the type of entity you should choose.  This is meant as an introduction only, to give you a bit of direction. It would be in your best interest to consult a tax or legal professional for assistance in determining the best option for your situation.

Best wishes in your new venture!

(Excerpts taken from Accountant’s World newsletters)

Testimonials:
“I have been working with First State Accounting since I opened my medical practice in 2005. Throughout that time, Terri has been nothing but wonderful when it comes to managing the financial aspect of my business. She keeps my Quickbooks data clean and accurate, helps me to make sense of the reports, reconciles all of my accounts, tracks my inventory, and emails or calls me back within minutes whenever I have a question or problem. As you may have realized by now, Quickbooks is less than intuitive, so I am so grateful to have Terri to help me and my staff use the software correctly and to its greatest potential. I rely on Terri to keep an eye on the financial health of my business, and she never disappoints!”
-Dr. Linda G Everett, Everett Medical

“We are a broker of industrial supplies in the Mid-Atlantic area and have been very happy with the services that First State Accounting has provided us since we began working with Terri over a year ago. She is thorough in her communication with us and always prompt in returning calls and/or e-mails.”
-Darren Wright, ValveSpecialties, Inc.