I highly recommend that you take your time when selecting your business entity. Yes, you can change it later down the road however there may be tax and other consequences as a result – so slow down and get it right the first time.
When selecting your entity, remember two really important things:
- Entity choice is state specific. It doesn’t happen at the federal level. You incorporate or organize at the state level. The laws of the individual state matter: not all entity choices are respected or treated the same in every state.
- Your choice of corporate entity may be different from your tax entity. Incorporation or organization with the Department of State in your state does not constitute a tax election with the Internal Revenue Service (IRS). For example, you can incorporate as a C corporation but elect with IRS to be taxed as an S corporation. You could also organize as an LLC but opt to be taxed as a partnership, S corporation, C corporation or disregarded altogether.
A sole proprietorship is the most simple form of business entity. Taxpayers do not file a separate tax return and instead, business income and expenses are reported on a federal form 1040, Schedule C.
A partnership is an association of two or more persons to carry on a business and can take different forms (like limited or general partnerships). A partnership files a separate return, a federal form 1065, and passes income and losses to the individual partners who are responsible for reporting that information on their individual tax returns.
A Limited Liability Company (LLC) is a hybrid entity that offers the option to be taxed as a partnership or a corporation.
A Single Member Limited Liability Company is an LLC with a single member, typically treated as a “disregarded entity” for federal tax purposes. That means there’s no separate tax form and income and expenses are reported on a Schedule C, just as with a sole proprietorship.
A C corporation is what most people think of when it comes to business. A C corporation files a federal form 1120 and pays any tax due. Shareholders also pay tax at their individual income tax rates for dividends or other distributions from the company (this is where the term “double tax” comes from).
An S Corporation is a corporation with tax treatment similar to a partnership. An S corporation files a federal form 1120-S which passes most items of income or loss to shareholders who are responsible for reporting that information on their individual tax returns.
Remember, the above information is a very simplified breakdown of each type of business structure and some states may not recognize all business structures mentioned above.
Contact me today! If you have any questions.