It is one thing to arrive at a business concept that you think will work for you and your unique situation. It is another thing entirely for you to structure the business in a legal manner that creates as advantageous a tax situation for you as possible.
It is also important to properly structure your business to limit your personal liability as much as possible and to protect your often considerable financial investment. Consider the most common types of business structures briefly discussed below to determine which is most appropriate for you.
This is the simplest type of business structure that there is and involves a business that is owned by only one person. This does not mean that a sole proprietorship is your only option if you are the only owner, but it does certainly have its advantages. Tax-wise, the expenses for running the business, in addition to the income, are included right on your personal income tax return that you file every year. You will just want to make use of Schedule C, detailing the expenses that you incurred, and offset that with your income.
If you are a sole proprietor, you will also need to file a Schedule SE along with your annual 1040. This same form is used to estimate how much self-employment tax you will need to pay, so keep that in mind as well. Under this business structure, you will need to also make estimated tax payments if you expect to have to pay a minimum of $1,000 in federal taxes. This is the amount you would need to pay after deducting your expenses and other allotted credits.
You might consider structuring your business as a partnership if it will be owned and operated by several different people. This is a legal structure that helps protect each of you while outlining the responsibilities and obligations that each partner will have in the business. The partners will own the business and assume liability for it as well. There are two main types of partnerships that determine the extent of this liability, however, and they are the limited and general partnership. A general partnership usually will see each partner manage the company directly, and also responsibility for the debts and other financial obligations that the business incurs. A limited partnership can have some general partners in it, but will also have some limited partners that are only financial investors in the business.
Developing a corporate structure, as you can imagine, is more time-consuming and expensive than the other types. This is primarily because it is a legal entity of its own, separate from the actual owners of the business. This entails compliance with various regulations and tax requirements. Given that information, you might wonder why in the world someone would choose to form a corporation. In many cases, there are tremendous benefits, such as liability protection for the owner of the business. The debt for the corporation is also not attached to the owner, so personal assets are not put at risk.