The Roth IRA   Business Auto Expenses – Part One   Business Auto Expenses – Part Two   Choice of Business Entity – Part One   Choice of Business Entity – Part Two   Statute of Limitations   Estimated Tax Penalties

I will be opening my new business soon and have been told that I should incorporate. Is incorporating a new business a good move?

Possibly. When starting a new business the choice of business entity is the first, and one of the most important, decisions the business owner must make. The basic choices are sole proprietorship, partnership, corporation (C or S) or Limited Liability Company (LLC). Each form of business has its good and bad points and you must review your particular business, in depth, to determine which is best for you.

Since this subject is of such importance and the particulars of each type of entity are lengthy, this article will focus only on the sole proprietorship and partnership form of business. In my next article I will address corporations and LLC’s.

The least expensive and least formal form of business is the sole proprietorship but it has many limitations. It is not able to accommodate multiple owners which prevents it’s use in many cases. The owner and the business are viewed as the same entity by the IRS and the business does not file a separate tax return. The owner reports the business profit and loss on his personal tax return thru Schedule C. Other forms will most likely be filed by the owner if the business has a profit or capital equipment has been purchased for use by the business. The owner is subject not only to income tax but also self employment taxes on the profits of the business. The owner is solely responsible for all business debts and has unlimited liability.

Partnerships, for most purposes, are similar to sole proprietorships with the major exception that they allow multiple ownership. The partnership must file its own separate tax return but the profits and losses (with some limitations) will be reported on the shareholders personal tax returns. The profits are subject to both income and self employment taxes. One disadvantage to this form of business is that each partner is liable for all partnership debts even if that partner did not incur the debt. The partners also have unlimited liability for any damages done by the partnership. These last two points should be given serious consideration.

Return to Tax Tips

Copyright © 2006. All rights reserved.