Starting a business

Before starting a business, you should ask yourself a few questions such as: what type of business structure will I use? Will you use your social security number (SSN) or an employer identification number (EIN)? Will you have partners or investors?  What location will I operate from?  How will people find out about my business?  Will I have employees?

Business Structures

Sole Proprietorship

You may want to start as a sole proprietor if you do not plan to have at least one business partner or investor(s).  A sole proprietor is someone who owns an unincorporated business by her/himself.  A sole proprietor can use their SSN for most business purposes but may want to consider obtaining an EIN from the IRS to use in business transactions with suppliers, service providers, and financial institutions.  An EIN may also be important for certain financial transactions in which the bank may want to confirm that there is a separation of business activities from personal activities.

As a sole proprietor, you may also want to consider the professional services that will be beneficial to your business getting off to a good start and being in existence for a significant period of time.  For instance, an attorney should be used to review and advise with contracts, leases, copyrights, employment matters, financial and investment service agreements.  An accountant should be used to advise on preparing financial statements and understanding the information contained in them such as income, expenses, assets, and liabilities.  A marketing consultant should be used to help expand your consumer base and grow your business using skills you currently possess.

A sole proprietor should become familiar with Schedule C, Profit or Loss from a Business – Schedule E, Supplemental Income and Loss – Schedule F – Profit or Loss from Farming – Schedule SE, Self Employment Tax – 1040ES, Estimated Tax for Individuals, Form 1099-MISC, Miscellaneous Income.

Partnership

A partnership structure should be considered if you plan to start your business with one or more other persons.  A partnership is a business in which two or more persons agree to carry on a trade or business.  Each person agrees to contribute money, property, labor or skill to the business in exchange for a share of the profits/losses.  For instance, one partner can be responsible for performing personal services for the business; another partner can be responsible for maintaining business relations and getting new business; one partner can be responsible for performing one or more professional services for the business such as accounting, tax return preparation, and marketing services.

A person can include an individual, corporation, or other partnership.  A partnership can have one or more general partners; one or more limited partners; or all equal partners.  A general partner … A limited partner …. Equal partners contribute equally to the operation of the business and share equally in the profit or loss from the business.

A partnership can be structured as a limited partnership, limited liability corporation, or …..  A limited partnership …. A limited liability corporation….. A limited liability partnership …

Persons interested in doing business as a partnership should become familiar with Form 1065, Return of Partnership Income – Schedule K ——- 1120S, Income Tax Return for an S Corp – 1040ES Estimated Tax for Individuals

Corporation

A corporate structure should be considered when you want to shield yourself and personal assets from liability that may arise from operating a business.  A C Corporation is an entity that provides one or more products or services for profit, determines net income or loss, pays taxes, and distributes income to shareholders.  A S Corporation is an entity that provides one or more products or services for profit but elects to pass income, losses, deductions, and credits to its shareholders.

Corporations must obtain permission from a state to operate; can have one or more classes of stock; and have a governing board that determines the mission, objective, and operating procedures for the business.

Persons interested in operating a business as a corporation should become familiar with Forms 1120 Corporate Income Tax Return, 1120S Income Tax Return for an S Corp, W-2 Wage and Income Statement, 940 Employer’s Annual Federal Unemployment Tax Return, 941 Employer’s Quarterly Federal Tax Return, 944 Employer’s Annual Federal Tax Return.

S Corporation

Is

Name Availability

Apply with the State – corporation, association, or partnership

• Articles of Incorporation
• Articles of Association
• Partnership

Purpose

Mission

Recordkeeping

• Bylaws
• Minutes of meetings
• General Journal/General Ledger
• Income Statements – shows Gross Profit from gross revenues and related expenses.  Net Profit – gross profit less all expenses.
• Balance Sheet – assets and liabilities

Employees and Independent Contractors

• Who determines when, where, and how the service is to be provided?
• W-2
• 1099-MISC

Form 1040,

• Schedule C
• Schedule E

Form 1120

Form 1065