Provided to you by Marvin Mowatt, CPA
Types of Business Organizations
When organizing a new business, one of the most important decisions to be made is choosing the structure of a business. Factors influencing your decision about your business organization include:
There are five common business types. The objective is to select the business type that best suits your objectives:
In General: The sole proprietorship is the easiest form of doing business because it requires no organizational filings or deeds conveying ownership of assets to a separate legal entity. A proprietorship may be operated under the name of the proprietor or use an assumed or fictitious name.
Unlimited Personal Liability for Loss: In a sole proprietorship, the owner is personally liable for the company, thus placing his or her entire personal assets and wealth at risk.
Management and Control: The owner (sole proprietor) has total management and control over the company. However, the price for total management and control is unlimited personal liability for the acts of the owner and/or the owner’s agents or employees.
High Taxes: In a sole proprietorship, the profits are subject to self-employment tax and regular income tax, which could be (on a combined basis) as high as 40%.
In General: A corporation is a separate and distinct legal entity. A corporation is formed at the state level by filing Articles of Incorporation and pay the requisite state fees and prepaid taxes with the appropriate state agency.
Management and Control: A corporation's management and control is usually vested in the board of directors who are elected by the shareholders of the corporation.
Ownership: Shareholders are the owners of a corporation.
Limited Personal Liability: Shareholders are usually not personally liable for the debts and liabilities of the corporation. If the assets of the corporation are not enough to cover the debts, creditors cannot go after the stockholders, directors or officers of the corporation to recover any shortfall.
Piercing the Corporate Veil: If corporate formalities are not observed, shareholders may be held personally liable for corporate debts. Thus, if a thinly capitalized corporation is created, funds are commingled with employees and officers, stock is never issued, meetings are never held, or other corporate formalities required by your state of incorporation are not followed, a court or the IRS may "pierce the corporate veil" and hold the shareholders personally liable for corporate debts.
Duration of a Corporation: As a separate legal entity, a corporation has indefinite life. Its existence is not affected by death or incapacity of its shareholders, officers, or directors or by transfer of its shares from one person to another.
Tax Filing: Upon formation, every Corporation must obtain a federal tax identification number. Annually, a corporation is required to file form 1120(C corporation) or 1120S (S corporation).
A corporation, which did not elect to be treated as an S corporation, is treated as a C corporation. The name is derived from subchapter C or the tax code. A C corporation is treated as a separate taxable entity for federal income tax purposes. C corporation earnings are subject to tax at the corporate level and, once distributed, at the shareholder level.
Domestic corporations meeting certain (qualifications. one-class-of-stock and 75 shareholder limit) may elect to be a an S corporation. the name is derived from Subchapter S or the tax code. Other than the built- in gains tax and the tax on excess passive investment income, there are no taxes paid at the S corporation level. Each shareholder takes into account a proportionate share of S corporation income, gain. loss, deduction, and credit each taxable year. Foreign corporation (incorporated outside the US) cannot elect the S corporation.
The corporate form offers certain TAX ADVANTAGES over other forms of business and it facilitates raising capital. The purchase of stocks is the preferred investment vehicle for investors over many other equity sales. For public companies, the stock market creates an even bigger advantage. CLICK HERE TO SEE ADVANTAGES OF CORPORATIONS
In General: A corporation that will be engaging in what a state might call "professional services" is formed pursuant to certain statutory provisions and the Articles of Incorporation must contain special language.
Definition of a Professional Service: "Professional Services" according to most states usually consists of the following business activities:
Annual Tax Filings: A Professional Corporation is required to file either federal form 1120 or 1120S. The corporation may also have to file state returns.
In a general partnership a multiple individuals, called general partners, manage the business and are equally liable for its debts. In a limited partnership, there must be at least one general partner who is personally liable for the obligations of the partnership. Limited partners are not directly involved in management and are liable only to the extent of their investments.
Pass-Through of Income or Loss: The partnership itself does not pay federal income taxes. Income is determined at the partnership level and then passed-through to the partners on their individual returns. Therefore, the partnership's “general partners , like sole proprietors, are responsible for self employment taxes. Each of the partners are required to make estimated tax payments (1040 ES) throughout the year.
partnership files its own annual partnership tax forms each year using IRS form
1065. Requisite State forms may also be required
Limited liability companies, or LLCs, are very popular because they combine the personal liability protection of a corporation with the flow-through tax benefits of a partnership. Despite not being personally liable for any of the organization's debt, LLCs members can actively participate in management.
Marvin Mowatt, CPA
1880 N.Congress Ave, ste 218 Lane
Boynton Beach, Florida 33426
Tel 561 282-6298
Copyright © 2004 Marvin Mowatt, CPA
All rights reserved.