What you need to know when it comes to forming your business

You have a great idea, you are excited and now you want to start your business.  So you are asking yourself, where do I begin?  First you need to understand that in any business you need to have a plan and a good tax advisor or accountant.  We will provide you with the basic and general information that should help you understand the business formation process and hopefully you will find this article useful.

Different states have different rules and regulation when it comes to business formation. There are five types of business entities that you can adapt for your business. Those are: Sole-Proprietor, INC, LLC, LLP, and PC

Sole-Proprietor-this is the most basic form of business formation. In most states you are required just to go to the county clerk, pay some fees, fill out an application and your business is registered.  You then can obtain an EIN (Employer Identification Number).  EIN commonly referred to as “Tax ID”.  You can obtain your Tax ID by calling the IRS or filing an application on their website. The county clerk will provide you with business registration certificate and you will be able to open a bank account on your business name. Your sole-proprietorship business is similar to a self-employed business and for tax filing purposes you will need to file individual tax return with a Schedule C.  This type of business formation does not provide any liability protection and the owner is liable for all the debts and obligations of its business.

Incorporated or “INC” at end of the business name. This entity is designed for owners that would like to have liability protection.  The individual owner or a shareholder of the Corporation in most cases will not be liable for Corporations debts and obligations. In order to incorporate you will need to file article of formation or organization with Dept of State where your business will be operating. If you have multiple locations, you can incorporate in several states.  The taxation of Inc entity can be either as C Corporation filing form 1120 or as S Corporation filing form 1120 S with the IRS.  Depending on the state of incorporation, similar forms might be required to be filed with the State government as well. Note that in order to be treated as S Corporation for tax filing purposes you need to file form 2553 with the IRS.

Limited Liability Company or “LLC” at end of the business name. This entity provides much needed tax flexibility and is the most popular entity choice for small and mid-size businesses. As you might have understood the LLC like INC provides limited liability protection. In order to form an LLC you will need to file article of formation or organization with Dept of State where your business will be operating. If you have multiple locations, you can form the LLC in several states. The nice thing about LLC’s is that LLC can be taxed four different ways: either like self-employed individual, filing Schedule C of 1040, or like a Corporation filing either 1120 or 1120S or like partnership filing form 1065 with the IRS.  Depending on the state of formation, similar forms might be required to be filed with the State government as well. So after you will form your LLC with the State, you then will need to apply for the EIN number.  You will need to indicate how your LLC should be taxed.

Limited Liability Partnership or “LLP” at end of the business name.   This entity is designed for 2 or more individuals that want to form a business partnership. It provides much needed limited liability protection to the partners.  In order to form LLP you will need to file article of formation or organization with Dept of State where you business will be operating. If you have multiple locations, you can form the LLP in several states. For tax purposes, LLP needs to file form 1065 with the IRS.  Depending on the state of formation, similar forms might be required to be filed with the State government as well.  After you will form your LLP with the State you then will need to apply for the EIN number with the IRS.