| Selecting Your Business Structure | | | | income and losses on their personal tax returns and |
| When beginning a business, you must decide what | | | | are assessed tax at their individual income tax rates. |
| form of business entity to establish. The type of | | | | This allows S corp to avoid double taxation on the |
| business entity determines which income tax return | | | | corporate income. S corporations are responsible for |
| you have to file. The most common forms of business | | | | tax on certain built-in gains and passive income. |
| are the sole proprietorship, partnership, and corporation. | | | | To qualify for S corp status, the entity must meet the |
| A Limited Liability Company is a relatively new | | | | following requirements: |
| business structure allowed by state statute. | | | | 1. Be a domestic corporation. |
| Legal and tax considerations enter into selecting a | | | | 2. Have only allowable shareholders including individuals, |
| business structure. | | | | certain trust, and estates and may not include |
| Sole Proprietorship | | | | partnerships, corp or nonresident alien shareholders. |
| A sole proprietor is someone who owns an | | | | 3. Have no more than 100 shareholders. |
| unincorporated business by himself or herself. | | | | 4. Have one class of stock |
| However, if you are the sole member of a domestic | | | | 5. Not be an ineligible corporation i.e. certain financial |
| Limited Liability Company, you are not a sole proprietor | | | | institutions, insurance companies, and domestic |
| if you elect to treat the Limited Liability Company as a | | | | international sales corporations. |
| Corp. | | | | Limited Liability Company. |
| Corporations | | | | A Limited Liability Company is a relatively new |
| In forming a corporation, prospective shareholders | | | | business structure allowed by state statute. |
| exchange money, property, or both, for the entity | | | | Limited Liability Companies are popular because, similar |
| capital stock. A corp generally takes the same | | | | to a corporation, owners have limited personal liability |
| deductions as a sole proprietorship to figure its taxable | | | | for the debts and actions of the Limited Liability |
| income and can can also take special deductions. For | | | | Company. Other features of Limited Liability |
| federal income tax purposes, a C corp is recognized | | | | Companies are more like a partnership, providing |
| as a separate taxpaying entity. A corp conducts | | | | management flexibility and the benefit of pass-through |
| business, realizes net income or loss, pays taxes and | | | | taxation. |
| distributes profits to shareholders. | | | | Owners of a LLC are called members. Since most |
| The profit of a corp is taxed to the entity when | | | | states do not restrict ownership, members may include |
| earned, and then is taxed to the shareholders when | | | | individuals, corporations, other Limited Liability |
| distributed as dividends. This creates a double tax. The | | | | Companies and foreign entities. There is no maximum |
| business does not get a tax deduction when it | | | | number of members. Most states also permit single |
| distributes dividends to shareholders. Shareholders | | | | member LLC, those having only one owner. |
| cannot deduct any loss of the entity. | | | | A few types of businesses generally cannot be LLC, |
| S Corporations | | | | such as banks and insurance companies. Check your |
| S corp are business entities that elect to pass | | | | states requirements and the federal tax regulations for |
| corporate income, losses, deductions and credit | | | | further information. There are special rules for foreign |
| through to their shareholders for federal tax purposes. | | | | LLC. |
| Shareholders of S corp report the flow-through of | | | | |