STARTING A BUSINESS
When forming a business alone or with others, you need to decide on the most advantageous format. There are multiple factors to consider, including the cost of forming the business, tax benefits, what legal documents must be filed to create the business, what legal documents must be filed yearly to continue the business and protection from liability.
In structuring your business, it may be confusing to compare the various business forms. As an experienced business attorney and Certified Public Accountant, I can assist you in making the best choice for your situation. Here are some of the different business formats I can help you with:
Sole Proprietorship
A sole proprietorship is owned by one individual who is the manager and operator of the business, but he can have employees. The sole proprietor owns all the assets and profits of the business. Legally, the business and the individual are the same, so as a sole proprietor you are personally liable for any debts of the business. This means creditors can reach not only your business assets, but also personal assets like your residence or savings. Liability includes not only purchases and contracts, but also any amounts owed resulting from lawsuits.
Advantages |
Disadvantages |
- No formal filing or formation, other than local licenses or fictitious business name filing
- Sole decision maker
- Profits go directly to owner
- Losses can be claimed by owner on taxes
- Easy and inexpensive to form
- Easy to dissolve
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- Unlimited personal liability for business debt; a creditor can collect from your personal assets
- Difficult to raise funding, usually must use personal funds or consumer loans
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Sole proprietorship profits are taxed on individual owner’s tax return. Examples of tax forms required include:
- Form 1040: Individual Income Tax Return
- Schedule C: Profit or Loss from Business (or Schedule C-EZ)
- Schedule SE: Self-Employment Tax
- Form 1040-ES: Estimated Tax for Individuals
- Form 4562: Depreciation and Amortization
- Form 8829: Expenses for Business Use of your Home
- Employment Tax Forms
Although a sole proprietorship is the simplest business form, there are still legal and tax issues to consider. I can advise and assist you with:
- Business property leases;
- Business contracts and agreements;
- Zoning and licensing;
- Liability and property insurance;
- Rrecord-keeping for tax and other purposes;
- Bbusiness income tax deductions;
- Business depreciation and amortization of assets and real estate;
- Home office deductions (including home improvement costs);
- Payroll tax reporting for full or part-time employees, including any household cleaning help or gardening service;
- Business tax return preparation.
General Partnership
A general partnership is two or more people in business together. General partnerships are similar to sole proprietorships in that legally the business and the individuals are the same. The partners are personally liable for any business debt.
Advantages |
Disadvantages |
- No formal filing or formation is required, however a written agreement is highly recommended
- Easier to raise funds with more than one owner
- Partner shares in business decisions and duties
- Can attract skilled employees by offering them a partnership
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- No intent to create a partnership is needed: if there are two or more owners a partnership is created
- Partners are individually and jointly liable for business debts.
- Profits are shared
- Each partner is liable for the business debts created by the other partners
- Sharing in decisions can lead to disagreements
- The withdrawal of a partner can dissolve the business
- If you have no written partnership agreement, state law supplies rules if you have to go to court
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General partnership profits are also taxed on individual owner’s tax return. Examples of tax forms required include:
- Form 1065: Partnership Return of Income
- Form 1065 K-1: Partner's Share of Income, Credit, Deductions
- Form 4562: Depreciation
- Form 1040: Individual Income Tax Return
- Schedule E: Supplemental Income and Loss
- Schedule SE: Self-Employment Tax
- Form 1040-ES: Estimated Tax for Individuals
- Employment Tax Forms
How can I assist you with your new general partnership? Of course, my service includes the preparation and filing of your annual tax documents. While I will advise you on deductibility of expenses, record keeping and tax issues, the most valuable service I can give you is assistance in limiting your personal liability. If you chose a partnership, you can limit your potential for lawsuits with a well-drafted partnership agreement. My experience in business law allows me to draft an agreement that will help prevent disputes and litigation. Without a well-drafted agreement, your partnership conflict is susceptible interpretation by the courts.
Limited Partnership
In a limited partnership, there is at least one general partner who manages the business, and at least one limited partner who invests money in the business. A limited partner can receive profits from the business but is only liable up to the amount of his investment. The general partner manages the business and is still personally liable for any business debt.
Advantages |
Disadvantages |
- Much easier to raise funding than sole proprietorships or general partnerships
- Liability for limited partner is limited to the amount of their investment
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- General partner still has unlimited personal liability
- Formation requires filing with the Secretary of State
- Formal partnership agreement highly recommended
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How can I assist you with your new limited partnership? I will prepare and file your certificate with the Secretary of State, prepare your limited partnership agreement, prepare and file your annual tax documents and advise you regarding record keeping and deductible expenses.
Corporation
A corporation is considered by the law to be a separate entity from its owners. Because it is a legal entity, it can be taxed, sued, can enter into contracts and can borrow money. The owners are shareholders. The shareholders elect a board of directors to manage the company. The corporation has a life of its own and does not dissolve when ownership changes. Below are the advantages and disadvantages of having a corporation:
Advantages |
Disadvantages |
- Liability of shareholders limited to price paid for their stock
- Can raise additional funding by selling stock
- Cost of employee benefits are deductible
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- Cost of formation is higher
- Process of incorporation is formal and requires filing with the Secretary of State
- “C” Corporations are taxed on their profits AND dividends paid to stockholders are taxed
- Board members can be held liable where they fail to exercise management duties
- Requires formalities such as annual shareholders meetings, board meetings and keeping minutes.
- Failure to follow formalities can result in the loss of limited liability status
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There are two types of corporations that are popular with small to mid-sized businesses. Each is explained below.
“C” Corporations
A “C” corporation is the regular corporation that is taxed as a separate entity. It requires these tax forms:
- Form 1120 or 1120-A: Corporation Income Tax Return
- Form 1120-W Estimated Tax for Corporation
- Form 8109-B Deposit Coupon
- Form 4625 Depreciation
- Employment Tax Forms
- Other forms as needed for capital gains, sale of assets, alternative minimum tax, etc.
“S” Corporations
An “S” corporation allows the profits to be taxed similar to a partnership if certain qualifications are met; a close corporation is owned by a small number of stockholders and has special statutory rules regarding management and duties of the board of directors.
- Form 1120S: Income Tax Return for S Corporation
- 1120S K-1: Shareholder's Share of Income, Credit, Deductions
- Form 4625 Depreciation
- Employment Tax Forms
- Form 1040: Individual Income Tax Return
- Schedule E: Supplemental Income and Loss
- Schedule SE: Self-Employment Tax
- Form 1040-ES: Estimated Tax for Individuals
- Other forms as needed for capital gains, sale of assets, alternative minimum tax, etc.
Professional Incorporation Help
Unlike online “incorporation services,” I will design a corporate structure that is customized to your requirements, goals and resources. I will draft and file all documents required to establish your corporation, including:
- Articles of Incorporation
- Bylaws
- Action of Incorporator
- Notice of First Board of Directors Meeting
- Waiver of Notice of First Board of Directors Meeting
- Minutes of First Board of Directors Meeting
- SS-4 State Tax ID application
- Form 2553 Federal S Corporation election
- W-4 Employee withholding certificate
- DE 1 State Employer registration
- DE 34 State New Employee registration
- DE 4 State Employee withholding certificate
- DE 542 State Report of Independent Contractors
- Statement of Information
- State Securities Regulation 25102(f) filing, Form 260.102.14
- Federal Securities Regulation, Form D
- Fictitious Business Name Statement
- Business License
Additionally, I will continue to support your business by ensuring the completion of corporate formalities such as your Annual Corporate Minutes. I will draft and file your quarterly State and Federal Wage and Withholding Report and Payroll Tax Deposit coupons. And of course, I will prepare and file your annual state and federal corporate tax returns, payroll tax returns, W-2 and W-3 statements.
As your business grows and its needs change, I am available to reassess your corporate structure and advise you when changes are needed.
Limited Liability Company (LLC)
The LLC is business structure that combines the limited liability of a corporation and the tax benefits and management flexibility of a partnership. Formation is more complex than a partnership and requires filing with the Secretary of State. The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued, if desired, by a vote of the members at the time of expiration.
Advantages |
Disadvantages |
- Extremely flexible management
- Liability limited to company assets
- Taxed as a partnership, no double taxation as in C corporations
- Ability to choose management by either members or a manager
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- Formal certificate filing with the Secretary of State
- Membership agreement required
- Cost of formation is higher than general partnerships or sole proprietorships
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Tax forms are similar to those of a partnership, but for more complex LLCs there may be some corporate tax forms required.
How can I assist you with your new LLC? An LLC is an extremely flexible business format. I can assist you in designing a custom LLC. Your individually designed LLC can be designed to operate informally like a partnership but without personal liability or formally as a corporations but without the double taxation of a “C” corporation. I will, of course draft and file all formation documents and tax forms as well as design your LLC Membership agreement.
Remember, the planning, organization and format of your business is crucial to maximize your tax benefits and protect personal assets. You need to concentrate on running and expanding your business. I can help you concentrate your talents on running your business, not filling out forms. Call me and we can get started today!
How to Contact Bruce A. Wilson, APLC
I make an effort to accommodate urgent matters, and new clients are always
welcome. For more information or to make an appointment, please contact me either by:
Telephone: (619) 497-0627
E-mail:
I can be reached by telephone Monday through Friday, 9:00 a.m. to 5:30 p.m. You may also use the
form below to contact me. This form is answered Monday through Friday during
the work day. Please remember that for me to become your attorney, we must first have a written attorney-client agreement signed by both of us, so please do not email any confidential information at this point. After I have reached an agreement with you, we can then exchange information freely. I look forward to helping you.
