Ebusiness 101 - Part 3: Setting Your Business Structure

To stay in step with the IRS, establish your business structure right away. The manner in which your business is formed will determine how you divide profits and pay your taxes at year-end. You have a range of choices, but the most common business structures include corporations, partnerships and sole proprietorships.

  Corporations receive money or property from shareholders in exchange for a percentage of revenue. Corporations have an unlimited life and can transfer ownership easily. Owners have limited liability, not to exceed their actual invested funds. Set-up, however, can be complex, requiring a charter and a set of bylaws, among other paperwork.
  Partnerships include two or more individuals, each contributing their own skills, experience, capital and revenue in exchange for a percentage of the business profits and losses. Partnerships are common in the legal and professional fields, with each stakeholder absorbing unlimited liability for business debt. Partnerships file their own tax return, issuing a Schedule K-1 to each partner for individual filing. Each partner is responsible for paying their own estimated taxes each quarter.
  A sole proprietorship is when one individual owns a business and chooses not to incorporate. These are the easiest and least expensive to establish. This is typically the most common structure for start-up, easily maintained. Sole Proprietors typically name their business after the owner or a fictitious business name, filing a form through the town, city or county to affiliate their business with its chosen name. Income and expenses are reported under a sole proprietor’s individual income tax return. Keep in mind, sole proprietors absorb unlimited personal liability for their business debts.
Hybrid forms of organization include Limited Partnerships, Limited Liability Partnerships, Professional Corporations and Subchapter S Corporations. Consult with a reputable attorney to determine the best avenue for your business. Stay tuned for Part Five: Developing a Sales, Marketing and Business Plan in this ten part series.
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