Are You Planning On Starting A Business?
by Jason M. Goloboy, CPA
Have you decided how your business should be formed?Has your professional advisor discussed the ramifications with you of being the only owner?You can operate as a sole proprietor which does not provide you any liability protection, or as a corporation (the differences between a “C” or an “S” corporation should be addressed).If there will be more than one owner, then you can utilize the following as a guide to your entity choice.You should note differences between flow-through types of entities (only one level of taxation), and the “C” corporation (which incurs and pays its own tax).
“C” corporation – if this entity has a profit then federal and state taxes are paid at the entity level.If certain payments other than payroll are distributed to the stockholders, then a second level of tax will be paid by the stockholders at their individual levels.
The following are flow-through types of entities.Only one level of tax is paid by the individual owner by inclusion of the entity’s tax attributes in the individual’s income tax return.
“S” corporation – a small business corporation that meets certain requirements, such as a limit on the number and types of shareholders, has only one class of stock (the stock may have different voting characteristics), is not a member of affiliated group, etc.The tax is paid at the individual level and the entity has limited liability.
General Partnership – does not have liability protection and the tax is paid at the individual level.Any one of the general partners may be empowered on behalf of the partnership.
Limited Partnership, also known as a Family Limited Partnership – has significant liability protection.Has one or more general partners of which, if an operating business will be conducted, one should be an S corporation (to provide liability protection).Commonly used to control family wealth and to expedite transfers to the next generation.
Limited Liability Company (LLC) or Limited Liability Partnership (LLP) – a new type of entity in Massachusetts that has been adopted by forty eight of the fifty states (Vermont and Hawaii excluded).Dependent on the type of business and business objectives, this may be the entity of initial choice, however the operating agreement must be carefully drafted to avoid inadvertent corporate classification and other potential pitfalls.
In the creation of the business entity there are many tax, including state tax issues, and non-tax issues that need to be addressed.
The author has been providing advise to business owners and individual taxpayers for over thirty years.He is managing shareholder of our firm and is also exceptionally knowledgeable in the design, development, and implementation of a computerized business environment system.This includes analyzing information system needs, ascertaining the hardware, computers, printers, imaging and network operating system requirements, and determining the software necessary to run the business applications.