Starting a new business is exciting! At least until you get the paperwork part. It’s important that you first identify just what type of business you in regards to the IRS.
If you’re starting a new business here’s what you need to know about filing statuses for businesses:
LLC or Limited Liability Corporation - An LLC protects you from personal responsibility of business debts and claims. So, if you owe money through debt or lawsuit, only the assets owned by the business can be sought to satisfy those claims. However, you still report the profit and losses of the business on your personal tax filings. Visit IRS page on LLCs for more details>>
Sole Proprietorship - Basically, this is when you and only you are the company. For example, you’re a consultant, carpenter or photographer. You claim profits and losses on your personal income tax and are taxed on your profits. The drawback here versus an LLC is that you CAN be held personally liable for costs incurred by the business. A pro to this classification though is that it is easy to setup and usually requires very little paperwork, especially if you’re doing business as (DBA) your own name–for example, “John Smith Photography.” Visit IRS page on Sole Proprietorships for more details>>
Partnership - This one is a bit more obvious. It’s when two or more people go into business together pooling together money, labor and/or skills with an expectation of sharing the profits. Under this structure, a partner does not report the entire profit and loss of the business but reports only their own share of the profits. Visit IRS page on Partnerships for more details>>
Corporation (C Corporation) - Corporations are their own entity and report a profit and losses the way a sole proprietor would. A corporation differs from a Partnership because shareholders, while investing assets like a partnership, are receiving capital stock in exchange for said investments. A corporation is taxed on its profits and then the shareholder is taxed on the profit they receive from the corporation. Visit IRS page on Corporations for more details>>
S Corporation - An S Corporation is much like a C Corporation but passes all profits, losses and deductions on to its shareholders. This prevents the entity from being taxed twice like a C Corporation is taxed. However, there are multiple requirements the organization must meet to be eligible. For example, you have to be a domestic corporation with no foreign shareholders and you must have less than 100 shareholders. Visit IRS page on S Corporations for more details>>
Keep in mind these filing statues are for Federal only and each state has their own criteria and you’ll want to check with them. Give us a call today and we can help you get set up or any any questions you may have.
Do you have the support you need to manage your small business bookkeeping?
Contact us to schedule an appointment to speak with a local small business advisor.