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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. Among the most popular business
structures are sole proprietorships, partnerships, corporations and S Corporations.
Each has separate tax requirements to consider. 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, along with a Schedule
C or Schedule C-EZ. The Internal Revenue
Service 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: Tax Guide for Small Business (Schedule C and C-EZ). 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
1120 to report its income, gains, losses, deductions, credits, and to figure
its income tax liability. It may file Form
1120-A if 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. | 
