Assist clients who wish to start a business to determine which legal structure is best for their needs (the decision has important legal and tax consequences) and guide them in establishing the business.
- Each state has rules and regulations for establishing legal business entities.
- We can help clients to set up a sole proprietorship, a partnership, a corporation (S or C), an LLC (limited liability company) or a non-profit organization.
- A sole proprietorship is an unincorporated business with one owner who pays personal income tax on profits from the business. There is no separate legal entity created by a sole proprietorship, unlike corporations and limited partnerships. Therefore, the sole proprietor is not safe from liabilities incurred by the business.
- A partnership is a business organization in which two or more individuals manage and operate the business. All the partners are equally and personally liable for the debts of the business.
- A corporation (S or C) is a legal entity that is separate and distinct from its owners.
A corporation is created (incorporated) by a group of shareholders who have ownership of the corporation, represented by their holding of common stock.
The most important aspect of a corporation is limited liability. That is, shareholders have the right to participate in the profits, through dividends and/or the appreciation of stock, but are not held personally liable for the company’s debts.
- In a C corporation (most corporations are in this category), income is taxed at the corporate level and is taxed again when it is distributed to owners.
- In an S corporation, the business can pass income directly to shareholders and avoid the double taxation that is inherent with the dividends of public companies. In order to qualify—a corporation must be a domestic corporation, must not have more than 100 shareholders, must include only eligible shareholders and must have only one class of stock.
- An LLC (limited liability company) is a business structure that offers its owners protection from personal liability for business debts, like a corporation. However, unlike a corporation, which must pay its own taxes, an LLC is a pass-through tax entity: The profits and losses of the business pass through to its owners, who report them on their personal tax returns just as they would if they owned a partnership or sole proprietorship.
- A non-profit organization is a business entity that is granted tax-exempt status by the Internal Revenue Service—it is not required to pay income tax on the money earned from fundraising activities or donations. Donations to a nonprofit organization are often tax deductible to the individuals and businesses making the contributions. Nonprofit organizations are also called 501(c)(3) organizations after the section of the tax code that allows them.
- To qualify for tax-exempt status, an organization must further a religious, charitable, scientific, literary, educational, public safety, amateur sports or cruelty prevention purpose. It must also provide a public benefit.