HOW TO FORM A BUSINESS

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As soon as you decide that you are going to start your own business, you immediately have a big decision to make - what type of entity will you establish? Your decision can have a big impact on your taxes. The most common types of small businesses and some factors to consider for each follow the checklist below. 

HOW TO FORM A BUSINESS:

1. Choose a business name and check your state's website for availability. 

Here's the site for SC: https://businessfilings.sc.gov/BusinessFiling/Entity/Search

2. Choose a registered agent. This is someone with a physical location within the state that you will register your business and must be available during regular business hours. You can name yourself as your own registered agent, but there are also many companies that you can hire to ensure that you stay on top of certain filings.

3. Create an operating agreement that details how your business is organized, management, how income is distributed, how the business may be dissolved, etc.

4. File Articles of Incorporation in the state you choose to form your business (usually your resident state). For SC, the site is the same as listed in #1 - you will continue to create your company after confirming the name is available.

5. Apply for an EIN with the IRS. This is not necessary if you are creating a single member LLC that will not be paying wages to employee. The website is:      https://sa.www4.irs.gov/modiein/individual/index.jsp    .

6. Open a business bank account & credit card. There are plenty of free options available for this. You should do your own research, but I've had a great experience with Blue Vine for my bank. 

MOST COMMON TYPES OF SMALL BUSINESSES

SOLE PROPRIETORSHIP

This is the most simple form of business. It does not require the state filings mentioned above, but leaves you personally liable for any business debts or lawsuits. All income & expense are reported with your personal tax return and the net profits are subject to self employment tax. You will need an EIN so that you can file payroll tax returns if you hire employees. While not necessary, you may also want to apply for a DBA name with your state. 

GENERAL PARTNERSHIP

Like a sole proprietorship, no state filings are necessary. If you go into business with someone, a general partnership is established by default. You should have a partnership agreement that details who the partners are, their shares of profit and loss, partner responsibilities, how to handle disputes, etc. There are no liability protections for the partners, meaning they are all personally responsible for all business debts, including lawsuits. A partnership must file a separate tax return for information purposes, which is due to be filed on March 15th each year. Each partner's share of net profit or loss is reported on a K-1 form and profits are subject to self employment tax.

LIMITED LIABILITY COMPANY 

1. Single Member LLC

This type of entity is created by following the steps in the checklist above and has only one owner. Like a sole proprietorship, income & expenses are reported on the individual's personal tax return and subject to self employment tax. The member is not, however, personally liable for the business debts. Depending on the state that the business is registered in, there may be additional filing requirements, such as an annual report or franchise tax return.

2. Multi-member LLC

This type of entity is also created by following the steps above and is taxed like a general partnership. All income and expenses are reported on a separate tax return and the member's shares of profit or loss flow to them on Schedule K-1. Profits are subject to self employment tax. The members are protected from personal liability for the business debts. Like a single member LLC, there may be additional state filings necessary to stay in compliance with the state.

3. S-Corporation

To become an S-Corporation, a business must make an election on Form 2553 within 2 months & 15 days of when the business's first tax year starts, or when the election is to take effect. A new or existing LLC or Corporation can make this election. Regardless of how many members or shareholders there are, a separate tax return must be filed for this entity and is due March 15th each year. Net profits or losses are reported on Schedule K-1 and are *not* subject to self employment, which is probably the greatest benefit to forming this entity. However, you must keep in mind that shareholders/member are required to take a reasonable salary for the services they provide for the business. This salary is reported on a W2 each year. There are additional considerations for certain expenses, such as health insurance, fringe benefits, or home office expenses that need to be treated differently than they would with other entities. You'll want to make sure you address these types of expenses with your accountant ahead of the year end because they cannot simply be taken on your personal tax return later and can be significant deductions for you.