Business Formation Resources
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First Steps to Starting a Business
When starting a business, one of the first things you must decide is what form of business entity to establish. The business structure you choose will impact your everyday operations, personal risk, taxes and more. Below is an overview of the most common business structures in the U.S. For more details on IRS requirements, please visit the IRS website.
Common Business Structures / Entities
A sole proprietorship is a type of business structure that is owned and run by one person and in which there is no legal distinction between the owner and the business entity.
In 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.
S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
Limited Liability Company
A limited liability company (LLC) is a hybrid legal entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). Owners of an LLC are called members. Most states do not restrict ownership, so 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. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”).
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.
Online Business Formation Services
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Incfile.com was founded in 2004 and headquartered in Houston, Texas. Since starting we have assisted more than 250,000 entrepreneurs and small business owners form their businesses. Our mission is it to provide a superior user experience at an unparalleled value.
For do-it-yourself services, Nolo offers hundreds legal forms and online documents, as well as tools for business formation.
UpCounsel is an online marketplace for legal services that enables users to find and hire attorneys. The company offers access to the largest network of independent lawyers in the world.
Registering Your Business with the Government
In most cases, whoever you use to set up your business structure will also be able to handle any additional filing requirements with your state or the federal government. Consult with a lawyer or attorney to determine filing requirements for your particular business. Here are a few of the requirements you may need to act on:
Registering your business name. Once you form your business entity, the name of your company should be automatically registered with the state. You may also need to file a DBA registration with the state agency responsible for business filings, most often this is the office of the secretary of state.
Depending on the type of business you have and where your business is located, you may be required to register for licenses or permits from local licensing agencies.
Unless you are a sole proprietor, you will need to obtain a federal tax ID number. Your federal tax ID or Employer Identification Number (EIN) will be required for you to pay federal taxes, hire employees, open a bank account, and apply for business licenses and permits.
If you sell goods or services that are subject to sales tax, you will need to register with your state taxing agency, and you may also need to get a seller’s permit.