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Selecting a Business Structure

When starting a business you would need to decide what type of business you will be establishing. There are different types of business structure and you should know what the difference on all of them in order for you to be able to decide which one to create.

Business Structures
Sole Proprietorship
S Corporations
Limited Liability Company (LLC)

Sole Proprietorship
A Sole Proprietor is a someone who owns an unincorporated business by himself. Please note that if you are the sole member of a limited liability Corporation (LLC) then you are not a sole proprietor if you elect to treat your LLC as a corporation


A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.

Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions.

If you are a partnership or a partner (individual) in a partnership, use the information in the charts below to help you determine some of the forms that you may be required to file.


forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

If you are a C corporation or an S corporation use the information in the charts below to help you determine some of the forms that you may be required to file.

Corporations that have assets of $10 million or more and file at least 250 returns annually are required to electronically file their Forms 1120 and 1120S for tax years ending on or after December 31, 2006. For more e-file information, see References/Related Topic listed below.

S Corporations

An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss.

Next, determine how much capital you will need in order to get your business up and running. Most industries and fields have professional organizations that can provide information on the types of tools, equipment, and supplies needed for business start-up. These groups can also be helpful in determining how much overall cash-flow will be needed to keep the business afloat. If it seems feasible that you can obtain the money needed to start the business, then continue to the next step. If you will require capital that you don't already have, then talk with a local bank to find out if small business loan financing is possible. If you are purchasing an existing business, see if the the previous owner is willing to work out purchasing terms with you. Sometimes, it is advantageous to them not to receive funds in a lump sum. Therefore, they may be willing to finance all or part of the loan directly. Although we hear every day about all of the "free money" supposedly made available for small business development, those funds are generally strictly categorized and not typically open to the general public. If you are dependent upon free money for business start-up, you may have just encountered a major road block.

Limited Liability Corporation (LLC)

A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.

LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.

Note: This article is based mostly on information from the IRS website.

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