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.

In the second part of this two part article, I will address the corporation and LLC form of business.

A corporation is a separate legal entity that must be charted by the Secretary of State and is required to file its own tax return. Like the partnership it is able to have multiple owners. If it is a "C" corporation it will be subject to income taxes on its profits. An "S" corporation, generally, pays no income taxes and the profits or losses are passed thru to the shareholders like a partnership. If the shareholders work in the business, they will be employees and taxes will be withheld from their pay. In theory, the shareholders of a corporation are not personally responsible for liability claims on the corporation. In practice, this may or may not be the case. This should be kept in mind when making your choice of entity.

Limited Liability Companies (LLC) are the current rage among new business owners. An LLC is basically a partnership with limited liability for its members. It should be noted that since the LLC form of business is relatively new the limited liability feature has yet to be fully tested in the courts. At this point we are unsure that the LLC is truly a better form of business than a corporation. Only time will tell. The LLC must file its own tax return and the profits and losses are passed thru to the shareholders. The shareholder will generally be subject to not only income taxes but also self employment taxes.

Please keep in mind that the above information is only a small portion the information that you need to know in order to make this important decision. I recommend that you consult with a tax professional before making your final decision. It will possibly save you a great deal of money in the long run.

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