Legal Entities. 1. Sole Proprietorship 2. Corporation 3. Limited Liability Company (LLC)

Legal Entities

Legal Entities

1. Sole Proprietorship

2. Corporation

3. Limited Liability Company (LLC)

Sole Proprietorship

If you don’t from and LLC or incorporate, you area sole proprietorship.

Two or more people (except married couples) must choose another entity.

Sole Proprietorship

Disadvantages: more difficult to obtain financingresponsible for all business aspectsdebts are liability are your responsibility

Advantages:ease of formationminimal regulation on business operationsimple financial record keeping

Sole Proprietorship

Legally, you and business are one entityYou cannot be an employee of the businessNo payroll taxesSelf-employment taxesRegular income taxes (schedule C)

Schedule C

Partnerships

I

Partnerships

Eases loneliness of being self-employed

Allows time off

Adds diversity of services and approaches

Decreases overhead expenses

Partnerships

When two or more people contribute assets to carry on a jointly-owned business and share in its profits and losses.

Partnerships

Similar to sole proprietorship: minimal governmental regulations

More involved record-keeping

Must obtain a federal ID number (Form SS-4)

Must file a schedule K1 (form 1065) form

Partnerships

Partnership itself pays no taxes

Each partner files a K-1 form to report profits and losses

You are liable for debts and legal obligations incurred by partnership

Incorporating or LLC is the best way to protect against liability

Schedule K-1

Corporations

Corporations

Major categories:

C Corporations

S Corporations

Professional corporations

Corporations

Provides a business entity separate from the owner

Creates clear boundaries between work and your life

Owners who work in an incorporated business are considered employees

Usually the most costly legal structure !

Requires both federal and state (where incorporated) tax filing

Corporations

Contact State to determine requirements and fees

Many details involved

Process varies from state to state

You can incorporate under any State (Nevada, etc...) but each state has different regulations

- be sure your bylaws include approval of telephone meetings for shareholders and directors

Corporations

Minimal requirements:

Adopt and file articles of incorporation

Develop corporate bylaws

Hold first board of directors and shareholders meeting; prepare meeting minutes

Issue stock certificates

Corporations

Minimal requirements:

Obtain IRS employer ID number (EIN Form SS-4)

File for subchapter S status (within 75 days) or Start of new business (IRS form 2553)

Set up corporate book containing all corporate documents

Corporations

Minimal requirements for maintaining corporation status:

Conduct annual meetings

File minutes in corporate book

File documents annually with State

Corporations

If corporate book isinadequate, your corporate status can be nullified and result in severe tax consequences.

Keep corporate book up to date

Consult accountant and attorney

Corporations

Reasons for incorporating:

Ease of business transfer

Ability to raise capital by selling shares of stock

Potential tax advantages and fringe benefits - health and life insurance premiums - tuition reimbursement - tax-sheltered retirement plans (fully or partially deducted business expense)

C Corporations

Subject to corporate income tax on net profits

Potential for double taxationcan use all profits as tax-deductible salaries and fringe benefits

Income can be divided into paying shareholders and keeping rest of profits in the business (income-splitting)

Earnings taxed at 15% (usu. lower than individual taxation)

Must file annual return (Form 1120) by 15th day of 3rd monthafter close of fiscal year

Must make quarterly tax payments

S Corporations

Taxed like partnerships but retain liability protection

Same basic structure as C corps

Do not pay federal income tax (profits passed onto owners who then pay income tax at individual rates)

Primary advantage: reducing double taxation

Allows owners to declare business loss on individual returns (usu. first years of business)

Personal Service Corporations (PSCs)

Often the choice for wellness professionals

Some states require this entity

Benefits: owners separate from business fringe benefits similar to C corporations

limited liability protection

Not usually advantageous for a sole business owner

Taxed at a higher rate than other corporations

Income-splitting not allowed

Limited Liablity Corporations (LLCs)

Hybrid of partnership and a corporation

Most states require a minimum of two owners (spouse ok)

Offers many benefits of an S corp. with fewer drawbacks

Gives owners separate entity from business and providesa limited liability protection shield

Profits flow through the owners

Limited Liablity Corporations (LLCs)

Paperwork not as complicated

Must file Articles of a LLC or develop organizational agreement

File for an IRS employee identification number (EIN)

May or may not require annual meetings or additional filings with the state

Regulations vary: contact the Corporation Commission Secretary of State

LLCs file a form 1065 and each member files a yearly K-1 form

Each member reports profits/losses on individual tax returns