Starting Your Business Right
Starting a new business venture is exciting. Today because of the economy and the Internet there are more businesses being created than ever before in history.
As well as the exciting side of starting a business there is the essential side of setting it up correctly from the beginning. One of the most important steps of doing that is choosing the type of business entity that you will be using.
There are a few basic types of business entities that most people will want to consider. There are corporations, sole proprietorships, partnerships and limited liability companies (LLC). Each of these types of business entities comes with its own individual tax pros and cons.
As far as corporations go there are basically two different types to choose from. There are C corporations sometimes called regular corporations and there are S corporations which can also be called small business corporations. The federal income tax rules for each of these differ greatly.
Different Entities
The basic differences are that C corporations pay taxes as corporate entities while S corporations don’t. With an S corporation the individual shareholders split up to corporation tax burden.
The benefits of a C Corporation is that it can provide each employee mainly you think such as health insurance for you and your family, disability insurance, term life insurance, retirement plans, as well as deferred compensation plans and a corporation can write all these off as a legitimate business expense.
One of the biggest benefits of forming an S Corporation is the fact that you can avoid paying Social Security and Medicare tax. If you were set up as a different type of entity such as a sole proprietorship a partnership or an LLC you would be subject to all these self-employment taxes.
Most small home-based businesses do not choose to form a C corporation because of the IRS and state corporation laws that require this type of entity to hold annual shareholder meetings and to document the important decisions with corporate minutes and resolutions which have to be signed by the directors or shareholders. This type of entity is usually too involved to be worthwhile to do small online business person.
The other entities such as sole proprietorship partnership and a limited liability company all pass the income directly through its sole owner or members and is claimed as such one the individuals 1040 return.
Limited Liability Company.
Probably the most popular form of business entity would small business people is the limited liability company.
This type of entity you are considered a business owner and not an employee. The IRS does permit LLC owners to decide for themselves how they want their LLC to be taxed. It can be taxed as a pass-through entity or as a regular C. corporation. It is also allowable for you to change how you want your LLC to be taxed at a future date simply by using the IRS form 8832 which is also called the entity classification election form.
Limited liability company owners or members have the same liability from business debts and lawsuits as to corporation owners and this is one of the most attractive features to small business people.
Probably the biggest disadvantage of an LLC is that it does not allow its members to save on the unemployment taxes as does a C Corporation but most small business owners feel that the benefits of the LLC and the ease of requirements compared to a C Corporation make it the most widely chosen form of business entity among small business owners.
To starting your business right from the beginning is just a matter of taking into consideration the options that you have available and what will work best for your particular type of business and income situation.
There is no right or wrong choice and it’s always best to consult an attorney or a CPA before making your final decision. Once your business is set up to provide you with the most protection and best taxing structure you’re free to concentrate on the more fun aspects of building your own business and financial security.
Je Dunn has been writing for the web since 2001. Although he specializes in SEO he also works on projects like Best Heat Pumps [http://www.heatpumpcomparisons.org/best-heat-pumps.html] and Kitchen Ceiling Lights [http://www.recessedlightingfixtures.net/kitchen-ceiling-lights.html].
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