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Smart Money: Tips for Choosing a Business Entity

1:54 PM, Sep 19, 2013   |    comments
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• This is the simplest form of conducting business.
• The proprietor may choose to operate using a DBA name.
• Because this form does not involve a separate entity, a sole proprietorship offers very little liability protection.
• Taxable income or loss will be reported directly on the individual income tax return of the proprietor.
• Taxable income of a sole proprietorship will be subject to self-employment taxes.

• Partnerships are similar to proprietorships with respect to ease of formation.
• Also similar to proprietorships, partnerships typically offer very little liability protection to the partners.
• Partnership income will typically be subject to self-employment taxes.
• Partnership income and loss is passed through to the partners, who ultimately pay the related income tax.
• In some instances partners may be liable for the actions of their fellow partners.
• Although a partnership involves fewer formalities than a corporation, it is still wise to seek legal counsel because operating agreements and other legal documents may be prudent.

• A corporation can provide liability protection to the corporation's shareholders.
• A C corporation is a separate tax-paying entity.
• Although C corporations are subject to double taxation, they may also lend tax flexibility to some transactions.
• Corporations may provide an efficient way to attract investors.
• Transferability of ownership is more straightforward with a corporation than a sole proprietorship or partnership.
• Corporations involve more formalities and are more expensive to form than proprietorships or partnerships.
• Corporations are required to hold periodic board of directors meetings and to retain written minutes.
• C corporations may present tax savings for companies with little profits, especially if the owners are in higher individual tax brackets. The first $50,000 of corporate taxable income is subject to a 15% rate.

• S corporations provide relief from double taxation while preserving liability protection of the corporate structure.
• S corporations may provide opportunities to reduce exposure to self-employment taxes.
• It is important to remember that S corporation shareholders should pay themselves a reasonable salary or wage.
• S corporations do not typically pay tax. Rather, the taxable activity flows through to the shareholders, who report the elements on their individual tax returns and pay the related tax.
• There are certain ownership requirements that must be met in order to qualify as an S corporation.

• LLCs combine the flexibility of partnerships with the limited liability protection of corporations.
• LLCs are typically easier to form than corporations. However, legal advice should still be sought because the LLC may need an operating agreement, a membership transfer restriction agreement or other legal documents.
• While an LLC's default tax treatment is either a sole proprietorship or a partnership, it is possible for the LLC to elect to be treated as either a C corporation or S corporation for income tax purposes.
• LLC owners are referred to as "members" whereas corporation owners are "shareholders" or "stockholders."


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