Emil Estafanous, CPA

Business Structures

mycpaweb — Tue, 27 Oct 2009 23:10:36 +0000

When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. Legal and tax considerations enter into selecting a business structure.

For additional information, refer to Small Business Administration’s Choose A Structure webpage.

Sole Proprietorships

mycpaweb — Tue, 27 Oct 2009 23:01:30 +0000

A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.

If you are a sole proprietor use the information in the chart below to help you determine some of the forms that you may be required to file:

IF you are liable for:	THEN use Form:
Income Tax	1040, U.S. Individual Income Tax Return (PDF) and Schedule C (Form 1040), Pofit or Loss from Business(PDF) or Schedule C-EZ (Form 1040), Net Profit from Business (PDF)
Self-employment tax	Schedule SE (Form 1040), Self-Employment Tax (PDF)
Estimated tax	1040-ES, Estimated Tax for Individuals (PDF)
Social security and Medicare taxes and income tax withholding	941, Employer’s Quarterly Federal Tax Return (PDF) 943, Employer’s Annual Federal Tax Return for Agricultural Employees (PDF) 944, Employer’s Annual Federal Tax Return (PDF) 8109-B, Federal Tax Deposit Coupon (PDF) (to make deposits)
Providing information on social security and Medicare taxes and income tax withholding	W-2, Wage and Tax Statement (PDF) (to employee) and W-3, Transmittal of Wage and Tax Statements (PDF) (to the Social Security Administration)
Federal unemployment (FUTA) tax	940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (PDF) 8109-B, Federal Tax Deposit Coupon (PDF) (to make deposits)
Filing information returns for payments to nonemployees and transactions with other persons	See Information Returns
Excise Taxes	Refer to the Excise Tax web page

References/Related Topics

Other Useful Forms for Sole Proprietorship
Publication 334, The Tax Guide for Small Business (for Individuals Who Use Schedule C or Schedule C-EZ)
Publication 583, Starting a Business and Keeping Records
Husband and Wife Businesses
Distinguishing Between Self-Employed Individuals and Independent Contractors

Partnerships

mycpaweb — Tue, 27 Oct 2009 22:35:01 +0000

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.

Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions.

If you are a partnership or a partner (individual) in a partnership, use the information in the charts below to help you determine some of the forms that you may be required to file.

Chart 1 (Partnership)

If you are a partnership then you may be liable for…	Use Form…
Annual return of income	1065,U.S. Return of Partnership Income (PDF)
Employment taxes: Social security and Medicare taxes and income tax withholding Federal unemployment (FUTA) tax Depositing employment taxes	941, Employer’s Quarterly Federal Tax Return (PDF) and 943, Employer’s Annual Federal Tax Return for Agricultural Employees (for farm employees) (PDF)940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (PDF) 8109-B, Federal Tax Deposit Coupon (PDF)
Excise Taxes	Refer to the Excise Tax Web page

Chart 2 (Individual Partners in a Partnership)

If you are a partner (individual) in a partnership then you may be liable for…	Use Form…
Income Tax	1040, U.S. Individual Income Tax Return (PDF) and Schedule E (Form 1040), Supplemental Income and Loss (PDF)
Self-employment tax	1040, U.S. Individual Income Tax Return (PDF) and Schedule SE (Form 1040), Self-Employment Tax (PDF)
Estimated tax	1040-ES, Estimated Tax for Individuals (PDF)

References/Related Topics

Election for Husband and Wife Unincorporated Businesses
Husband and Wife Business
IR-2005-143, IRS Extends Transition Relief to Partnerships and Pass-Thru Entities Under New Code Section
IR-2005-146, IRS Releases Schedule M-3 for Partnerships
Other Useful Forms for Partnerships
Publication 541, Partnerships
Publication 583, Starting a Business and Keeping Records

Corporations

mycpaweb — Tue, 27 Oct 2009 22:25:13 +0000

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. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

If you are a C corporation, use the information in the chart below to help you determine some of the forms you may be required to file.

Corporations that have assets of $10 million or more and file at least 250 returns annually are required to electronically file their Forms 1120 and 1120S for tax years ending on or after December 31st. For more e-file information, see References/Related Topic listed below.

If you are a C corporation or an S corporation then you may be liable for…	Use Form…
Income Tax	1120, U.S. Corporation Income Tax Return (PDF)
Estimated tax	1120-W, Estimated Tax for Corporations (PDF) and 8109-B, Federal Tax Deposit Coupon (PDF)
Employment taxes: Social security and Medicare taxes and income tax withholding Federal unemployment (FUTA) tax Depositing employment taxes	941, Employer’s Quarterly Federal Tax Return (PDF) or 943, Employer’s Annual Federal Tax Return for Agricultural Employees (PDF) (for farm employees)940, Employer’s Annual Federal Unemployment (FUTA) Tax return (PDF) 8109-B, Federal Tax Deposit Coupon (PDF)
Excise Taxes	Refer to the Excise Tax Web page

References/Related Topics

S Corporations

mycpaweb — Tue, 27 Oct 2009 22:11:24 +0000

S corporations are corporations that elect to pass corporate income, losses, deductions and credit 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.

To qualify for S corporation status, the corporation must meet the following requirements:

Be a domestic corporation
Have only allowable shareholders
- including individuals, certain trust, and estates and
- may not include partnerships, corporations or non-resident alien shareholders
Have no more than 100 shareholders
Have one class of stock
Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.

In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders.

Filing Requirements:

Chart 1 – S Corporation

If you are an S corporation then you may be liable for…	Use Form…
Income Tax	1120S (PDF) (Instructions for Form 1120S (PDF)) 1120S Sch. K-1 (PDF) ( Instructions for Form 1120S Sch. K-1 (PDF))
Estimated tax	1120-W (PDF) (corporation only) and 8109
Employment taxes: Social security and Medicare taxes and income tax withholding Federal unemployment (FUTA) tax Depositing employment taxes	941 (PDF) ( 943 (PDF) for farm employees)940 (PDF) 8109
Excise Taxes	Refer to the Excise Tax web page

Chart 2 – S Corporation Shareholders

If you are an S corporation shareholder then you may be liable for…	Use Form…
Income Tax	1040 and Schedule E (PDF)
Estimated tax	1040-ES (PDF)

References/Related Topics

Compensation and Medical Insurance Issues
Employees, Shareholders and Corporate Officers
S Corporation Stock and Debt Basis
Special Rules for Health Insurance Costs of 2-Percent Shareholder-Employees (IRB 2008-2 Notice 2008-1)
Other Business Structures

Limited Liability Company (LLC)

mycpaweb — Tue, 27 Oct 2009 21:56:10 +0000

A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

Owners of an LLC are called members. Since most states do not restrict ownership, 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.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.

Classifications

The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file as a corporation, partnership or sole proprietorship tax return.

An LLC that is not automatically classified as a corporation can file Form 8832 to elect their business entity classification. A business with at least 2 members can choose to be classified as an association taxable as a corporation or a partnership, and a business entity with a single member can choose to be classified as either an association taxable as a corporation or disregarded as an entity separate from its owner, a “disregarded entity.” Form 8832 is also filed to change the LLC’s classification.

Effective Date of Election

The election to be taxed as the new entity will be in effect on the date the LLC enters on line 8 of Form 8832. However, if the LLC does not enter a date, the election will be in effect as of the form’s filing date. The election cannot take place more than 75 days prior to the date that the LLC files Form 8832 and the LLC cannot make the election effective for a date that is more than 12 months after it files Form 8832. However, if the election is the “initial classification election,” and not a request to change the entity classification, there is relief available for a late election (more than 75 days before the filing of the Form 8832).