Forms of Business

How you form your business must be one of your first consideration and it will have a direct bearing on many of the things you will have to do as you precede. There are now 4 basic forms of business available in Pennsylvania and most states, each with several variations. It is best to consult a Lawyer and Accountant before you make a final decision as to which best fits your objectives. Below are some brief descriptions of these business forms.

Sole Proprietor

The simplest and most common form of business used by most small, independent businesses is referred to as a "Sole Proprietorship." This is one where there is only one owner and no other structure has been designated.

As a sole proprietor, your income (or loss) from the business will be reported on Schedule C of your tax return and any profit of loss will then be included on your 1040 form along with any other regular income. NOTE: you will also be required to report this income on a "Self Employment" form and pay an additional 15.2% Self Employment Tax.

If you operate your business under a fictitious name (any name other than your own last name) you must file a "Fictitious Name Registration" with the state. You may not need a separate EIN number with IRS.

You are fully responsible for all bills or liabilities that the business incurs. Insurances, to protect your personal property, should be carefully selected in this form of business.

Partnerships

When more than one person is involved in a business it becomes a partnership. NOTE: In a partnership each partner is responsible for the total debts of the partnership and any partner can incur expenses or make agreements that bind the other partners. It is extremely important that a proper partnership agreement is drawn up to avoid problems down the line.

Partnerships require a separate tax return, though profits do flow through to your regular tax form, according to the amounts agreed to in your agreement.

In general all partnerships require a "Fictitious Name Registration" unless each partners name appears in the company name. An EIN Number is required by IRS.

Partners automatically cease to exist upon the death of any partner and paying the deceased partner's heirs the money due them could be a problem unless steps are taken to provide for this occurrence. Insurance is most important in this type of business.

Corporations

A Corporation can best be described as "Another Person." Corporations are formed by each state and they all have slightly different features. When you form a corporation in Pennsylvania you are governed by state corporate laws and taxation. Although you can form a corporation by filing your own papers with the Department of State, it is strongly recommended that you have it done by a competent business lawyer. A simple mistake on your initial registration could be extremely costly for years to come. Corporations must file separate tax returns with IRS and the State and corporate profits are taxed at a higher rate than normal.

Separate Corporate tax forms must be filed. If you do not employ a competent accountant you may face double taxation on corporate dividends.

You will become an employee of the corporation and as such must pay all required withholding taxes and carry workers compensation insurance on yourself.

A major advantage of a corporation is that your personal assets are shielded and the corporation is responsible only up to the capitalization of the corporation. NOTE: When borrowing funds most institutions will require your personal guarantee on the loan which will hold you personally responsible in the event of corporate failure.

S-Corporation is a special type of corporation which you must elect at a given time. It provides special tax benefits to small businesses. Be sure to ask your accountant about this option.

Limited Liability Companies

LLC is the latest form of business adopted by the state during the last year. It provides small businesses with many of the advantages of a corporation without the tax disadvantages. Like a partnership, it ceases to exist upon the death of a shareholder. Some of its strengths and weaknesses have yet to be tested. You should explore this option carefully with your Accountant and Lawyer. Many are advising waiting until the law is fully tested, appraised and perhaps modified before entering into it.