|
Choosing a structure for your business
By Cora M. Barnhart •
Bankrate.com
July 1, 1999 -- Now that you have finally made
up your mind to start your own business, you have a number of decisions
to make. One of the first things you will need to determine is the
form your business will take. This tax tip addresses very general
tax considerations for four forms: sole proprietorships, partnerships,
corporations and S Corporations. Small business owners should consider
legal issues separately.
Sole
proprietorship
This is the easiest type of business to establish and maintain.
You are the only owner and the business won't exist apart from you.
This means that its liabilities and assets, anything that incurs
costs or provides value, are yours. You also carry all the risks.
Paperwork for this type of business is relatively
simple. You will report any income and business expenses on your
personal income tax return.
The IRS needs an identification number to process
a business's tax return, but sole proprietorships can get away with
using the owner's Social Security number -- provided they don't
have employees or file returns for employment, excise, alcohol,
tobacco or firearm taxes. Sole proprietorships that don't meet these
conditions, as well as corporations and partnerships, need to obtain
an employer identification number from the IRS.
For more information on sole proprietorships,
see IRS
Publication 334: Sole Proprietorships.
Partnership
When two or more people join to conduct business, they often
form a partnership. Each partner contributes money, property or
labor, and any resulting profits or losses are shared.
Paperwork for this type of business is more
complex than for the sole proprietorship. Besides applying for an
EIN, the partnership must also file an annual information return
that reports the operation's income, deductions, gains and losses.
However, the partnership doesn't pay income tax. Profits or losses
are "passed through" to the partners. Each partner's tax
return will report his respective share.
For more information on partnerships, see IRS
Publication 541: Partnerships.
Corporation
Forming a corporation involves shareholders exchanging money
or property for shares of the company's stock.
One well-known disadvantage of forming a corporation
is double taxation. The corporation must pay taxes on its profits,
and shareholders pay a second round of taxes on the same profits
when they receive them as dividends.
A corporation has to file an income tax return
at the end of the year. It files Form 1120to report its income,
gains, losses, deductions, credits, and to figure its income tax
liability. It may file Form 1120-Aif its gross receipts,
total income, and total assets are each under $500,000 and it meets
certain other requirements.
In addition, the corporation must make estimated
tax payments as it earns or receives income during its tax year
if it expects the difference between its income tax and credits
to be $500 or more. Not paying an installment when it is due may
subject the corporation to an underpayment penalty.
Installment payments of estimated tax are due
by the 15th day of the 4th, 6th, 9th and 12th months of the corporation's
tax year.
For corporations that have a tax year ending
Dec. 31, installment payments are due on April 15, June 15, Sept.
15 and Dec. 15. If a corporation's tax year ends on June 30, the
installments are due on Oct. 15, Dec. 15, March 15 and June 15.
The IRS allows corporations to calculate installment
payments one of two ways. The first requires an installment equal
to 25 percent of the income tax the corporation will show on its
return for the current year. The second requires that installments
are 25 percent of the income tax paid the prior year, as it appears
on the corporation's last return. Use Form 1120-Was a worksheet
to calculate each required installment.
Unless a corporation volunteers to -- or is
required to -- make electronic deposits, payments and a completed
Form 8109are mailed or delivered to an authorized financial
institution or to the area Federal Reserve Bank. For more information,
see the instructions for Form
1120-W.
The Electronic Federal Tax Payment System is
used to make electronic tax deposits. A corporation
must use the electronic system if its total deposits for Social
Security, Medicare and withheld income taxes exceeded $50,000 in
1997.
If a corporation doesn't use the EFTPS when
it is required, the company may be subject to a penalty. Enroll
in the EFTPS by calling 1-800-945-8400 or 1-800-555- 4477. For general
information about the system, call 1-800-829-1040. For more information
on corporations, see IRS
Publication 542: Corporations.
S
Corporation
One way to get around the double-tax whammy of incorporating
is to request treatment as an S corporation. A company must meet
all of the following requirements to qualify:
- It must be a domestic corporation.
- It can only have one class of stock.
- It can't have more than 75 shareholders.
Keep in mind, a husband and wife and their estates are treated
as one shareholder.
- Shareholders can only be individuals, estates
(including estates of individuals in bankruptcy) and certain trusts.
For tax years beginning after 1997, certain tax-exempt organizations
may also be shareholders.
- It can't have nonresident alien shareholders.
- It can't be a financial institution using
the reserve method of accounting for bad debts.
- All shareholders must agree to be an S corporation.
An S corporation doesn't pay a tax on its income,
but rather passes its income and expenses through to the shareholders.
They report these items on their own income tax returns.
An S corporation must file a return on Form
1120S, U.S. Income Tax Return for an S Corporation.
This shows the results of the corporation's operation for its tax
year and the items of income, gain, loss, deduction or credit that
affect the shareholders' individual income tax returns.
The S corporation should send shareholders a
copy of Schedule K-1 (Form 1120S) showing their share of income,
credits, and deductions of the S corporation for the tax year. Distributive
shares of income, gain, loss, deduction, or credit of the S corporation
are reported on the appropriate lines and schedules of Form 1040.
For more information on corporations, see IRS
Publication: S Corporations.
-- Posted July 1, 1999
|
