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Taxsoftware.com’s Guide To Business Tax Forms

Taxsoftware.com’s Guide To Business Tax Forms

Sometimes the most difficult part of tax filing is picking the right form to file. It’s not easy to keep track of the difference between partnerships and limited liability corporations, S corporations or sole proprietorships. With this in mind, we offer here our first Guide To Business Tax Forms to help business owners and their tax preparers find the right form fast—and e-file hassle-free with Taxsoftware.com.

Forms of Ownership

Determining how to structure a company is a business owner’s first order of business. The form of ownership the company takes has an impact beyond the size and nature of the business and the level of control of the proprietor. Each ownership structure has different tax implications as well.

The characteristics of the different forms of ownership are discussed below, as well as the tax requirements for each style of company. If this review leads you to question the current structure of the business you have, consult an accountant and attorney to help you find a better fit for your company.

Sole Proprietorships

The vast majority of small businesses start out as sole proprietorships. The sole proprietorship is a simple, informal structure that is inexpensive to form. These firms are owned by one person or a marital community, usually the individual who has day-to-day responsibilities for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts, can freely transfer all or part of the business, and can report profit or loss on personal income tax returns. In the eyes of the law and the public, you are one and the same with the business.

Advantages of a Sole Proprietorship

·         Easiest and least expensive form of ownership to organize.

·         Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.

·         Sole proprietors receive all income generated by the business to keep or reinvest.

·         Profits from the business flow directly to the owner's personal tax return.

·         The business is easy to dissolve, if desired.

Disadvantages of a Sole Proprietorship

·         Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk.

·         May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.

·         May have a hard time attracting high-caliber employees or those that are motivated by the opportunity to own a part of the business.

·         Some employee benefits such as owner's medical insurance premiums are not directly deductible from business income (only partially deductible as an adjustment to income).

Partnerships

In a partnership, two or more people share ownership of a single business. Like with proprietorships, the law does not distinguish between the business and its owners. The partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed.

Partnerships are inexpensive to form; they require an agreement between two or more individuals or entities to jointly own and operate a business. Profit, loss, and managerial duties are shared among the partners, and each partner is personally liable for partnership debts. Partnerships do not pay taxes, but must file an informational return; individual partners report their share of profits and losses on their personal return. Short-term partnerships are also known as joint ventures.

Advantages of a Partnership

·         Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.

·         With more than one owner, the ability to raise funds may be increased.

·         The profits from the business flow directly through to the partners’ personal tax returns.

·         Prospective employees may be attracted to the business if given the incentive to become a partner.

·         The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership

·         Partners are jointly and individually liable for the actions of the other partners.

·         Profits must be shared with others.

·         Since decisions are shared, disagreements can occur.

·         Some employee benefits are not deductible from business income on tax returns.

·         The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Types of Partnerships

1.      General Partnership
Partners divide responsibility for management and liability as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.

2.      Limited Partnership and Partnership with limited liability
Limited means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for short-term projects or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership.

3.      Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such as well as distribute accumulated partnership assets upon dissolution of the entity.

Corporations

A corporation chartered by the state in which it is headquartered is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed, it can be sued, and it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.

C Corporation (Inc. or Ltd.)

This is a complex business structure with more startup costs than many other forms. A corporation is a legal entity separate from its owners, who own shares of stock in the company. Corporations can be created for profit or nonprofit purposes and may be subject to increased licensing fees and government regulation than other structures. Profits are taxed both at the corporate level and again when distributed to shareholders.

Shareholders are not personally liable for corporate obligations unless corporate formalities have not been observed; such formalities provide evidence that the corporation is a separate legal entity from its shareholders. Failure to do so may open the shareholders to liability of the corporation's debts. Corporate formalities include:

Corporations should always be assisted by a qualified attorney.

Advantages of a Corporation

·         Shareholders have limited liability for the corporation's debts or judgments against the corporations.

·         Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)

·         Corporations can raise additional funds through the sale of stock.

·         A corporation may deduct the cost of benefits it provides to officers and employees.

·         Corporations can elect S corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.

Disadvantages of a Corporation

·         The process of incorporation requires more time and money than other forms of organization.

·         Corporations are monitored by federal, state, and some local agencies, and as a result may have more paperwork to comply with regulations.

·         Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus it can be taxed twice.

Subchapter S Corporations (Inc. or Ltd.) 

Choosing Subchapter S incorporation is a tax election only. This structure is identical to the C Corporation in many ways, but offers avoidance of double taxation. If a corporation qualifies for S status with the IRS, it is taxed like a partnership; the corporation is not taxed, but the income flows through to shareholders who report the income on their individual returns.

The catch here is that the shareholder, if working for the company, and if the company shows a profit, must pay him/herself wages, and must meet standards of “reasonable compensation.” This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.

Limited Liability Company (LLC)

The LLC is a relatively new type of hybrid business structure that is now permitted in most states. The LLC is generally considered advantageous for small businesses because it combines the limited personal liability features of a corporation and the tax efficiencies and operational flexibility of a partnership or sole proprietorship. Profits and losses can be passed through the company to its members or the LLC can elect to be taxed like a corporation. LLCs do not have stock and are not required to observe corporate formalities.

Formation is more complex and formal than that of a general partnership. The owners are members, and they or appointed managers manage the LLC. 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, insurance companies and nonprofit organizations.  Check your state’s requirements and the federal tax regulations for further information.  There are special rules for foreign LLCs.

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.

LLCs must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets, continuity of life, centralization of management, and free transferability of ownership interests.