Training & Consulting
Starting a new business or thinking of reclassifying your business structure?
You may be starting a new business or maybe you’re just thinking of starting a new business. Maybe you already have a business and need to assess your current business structure because of recent growth, a need to re-examine personal liability, or other reasons. There are many factors to consider before determining your business structure. We can help you analyze the advantages and disadvantages of the types of business structures available and help you decide which would be best for your situation. The following is not intended to cover all aspects of each structure discussed, instead it is provided to give you an idea of the how income flows, and what the costs are for setting up and filing the necessary paper work to register your company and make it official. You are always invited to come in for a free consultation to pick our brain.
Sole proprietors are single owners who are responsible for the actions of his/her self and that of their employees. The sole proprietor reports all income and expenses on schedule C which then flows to that individual’s federal 1040 income tax return. The income is taxed once on the owner’s tax return. It’s simple and inexpensive to start. Its disadvantage is that the owner’s personal assets are more open in a legal case. In addition all net profit or income from the schedule C above $400.00 is subject to self-employment taxes. Self-employment taxes are Social Security tax of 12.4% (consisting of 6.2 % as the employee + 6.2% as the employer of the first $118,000 of net income) plus the Medicare tax of 2.90% consisting of 1.45% (employee portion) + 1.45% (employer portion) of every dolor of net profit. Because you are self-employed you must pay the employee and employers portion. We can fill out the necessary paperwork to register your sole proprietor business with the State of Ohio and file for a federal employer identification number to set you up and get you going within one day at a cost of just $100.00.
Partnerships are owned and controlled by two or more individuals. Owners are responsible for their own actions and the actions of the employees. Income is taxed once on each individual owner’s tax return. The partnership must file an information return form 1065 which states the partnerships income, expenses, gains, credits and losses. This information is then reported (flows) to each individual partner through form schedule K-1 based on each partners ownership percentage. The ordinary income and/or guaranteed payments stated on the K-1 will be subject to self-employment taxes on each individual partner’s federal 1040 income tax return. In this type of business structure the personal assets of the partners are more open to legal cases. A partnership requires a partnership agreement. The agreement is a must and will cover things like each partners investment amount, management duties, division of labor as well as profit sharing and financial responsibility. We will fill out the paperwork necessary to register your partnership with the state of Ohio including the name search, as well as filing for your federal employer identification number and get you set up within a day for a cost of just $200.00. The cost of the partnership agreement is an additional fee depending on the complexity. Most are between $50.00 and $150.00.
Limited Liability Company or LLC is a business structure that is owned by members and may include individuals, corporations, other LLC’s and foreign entities. Members are responsible for their own actions and the actions of the business. Income is taxed once on the member’s federal income tax return. The LLC files an Information return form 1065. The income/loss is reported to each member through form schedule K-1 as to their ownership percentages. The income that is reported as ordinary income and/or guaranteed payments from form K-1 is subject to self-employment tax. Personal assets are generally less open to legal attack. The LLC must have an operating agreement. The operating agreement allows you to structure your operating and financial relationships with your co-owners in a way that suits your business. One reason to make an operating agreement is to help ensure that courts will respect your limited personal liability. Having a formal written operating agreement will lend credibility to your LLC’s existence. One disadvantage is that all members must approve if management duties are transferred. We will file all the necessary paperwork to register your LLC with the state of Ohio, do the name search as well as applying for your federal employer identification number for a cost of $200.00. The operational agreement is an additional fee of between $50.00 and $150.00 depending on the complexity of the agreement.
Limited Liability Partnership or LLP is a business structure that provides its owners with limited personal liability. LLP’s are well-suited to professional groups, such as attorneys or accountants. An LLP protects each partner from debts against the partnership arising from professional malpractice lawsuits against another partner. The LLP files a federal form 1065 and issues a K-1 to each partner. Partners will pay self-employment taxes on all ordinary income and/or guaranteed payments. LLP’s require a limited liability partnership agreement. We will register your LLP with the state of Ohio, do the name search and apply for your federal EIN for a cost of $200.00. The LLP partnership agreement is an additional $50.00 – $150.00 depending on the complexity of the document.
Limited Partnership or LP is a business structure owned by at least one general partner and at least one limited partner. The partners are responsible for their own actions and the actions of the employees. Income is taxed once on the partner’s federal income tax return. A limited partnership is required to file a form 1065 and issues a K-1 to each partner. Ordinary income and guaranteed payments reported on the K-1 will be subject to self-employment tax when the individual partners file their federal 1040 income tax return. The general partner’s personal assets are more open to attack in a legal case. The limited partner’s personal assets are less open to attack in a legal case. Approval is needed from all partners before management duties are transferred. A partnership agreement is needed. We will file the necessary paperwork to register your limited partnership with the state of Ohio, do the name search and file for your federal EIN for a cost of $200.00. The limited partnership agreement is an additional $50.00 – $150.00 depending on the complexity of the agreement.
C-Corporations are taxed twice. The corporation pays taxes on corporate earnings by filing form 1120. The dividends (income) that are then distributed to its shareholders are taxable to the shareholder on their federal income tax return. The dividends are not subject to self-employment tax. Although C corporations are the most expensive to start, operate and maintain, they do have advantages that other business entities do not. Many C corporation benefits, such as health insurance, are not subject to employment taxes or ordinary income taxes. Additionally, funding for the corporation can be increased by selling shares of stock. A corporation is an independent legal entity owned by shareholders. Personal assets can be attacked up to the amount invested in the c-corporation, but business assets are taken first in a legal case. The cost to set up a C-corporation starts at $250.00, call us for a custom quote.
S-Corporations are taxed once, the corporate income, deductions, losses and credits are passed through to the shareholders based on their allocation percentage and reported on the shareholders federal income tax return. The s-corporation files an annual tax return form 1120S and issues a form K-1 to its shareholders. The biggest advantage to the s-corporation business structure is its flexibility in paying its earnings to owners as either earned income in the form of salaries and wages (subject to self-employment taxes) or as distributions (NOT subject to self-employment taxes). Although an s-corporation owner can reduce self-employment taxes by paying corporate profits in the form of a dividend distribution, the s-corporation owner must pay a wage or salary to him/her self, subject to employment taxes, that the IRS terms as “reasonable compensation”. For example: Let’s say that a landscaping contractor has a net profit of $100,000 and they pay themselves $12,000 in a salary (and paid self-employment taxes on that amount), and the remaining $88,000 is paid out to them as a dividend (not subject to self-employment taxes but will be subject to income taxes). The owner would save $13,464, or 15.30% in taxes for 2015 {88,000 x (12.4 Social Security tax + 2.9 Medicare tax)}. In this example the IRS would most likely find that a $12,000 per year salary of an owner/operator of a landscape company that nets $100,000 profit for the year, is not “reasonable compensation”. Another advantage is that owner’s liability is limited and therefore personal assets are less open to attack in a legal case. The cost for setting up an s-corporation will depend on whether you are starting as an s-corporation or converting an existing business structure to an s-corporation. The fee for a new start up is $250.00 and $450.00 for a conversion.
The above explanations are not intended to be exhaustive in any way. Instead they are intended to provide you with a very basic explanation of the types of business structures and the cost to develop them. You are invited to come in and receive a free consultation to discuss the finer details and to ask questions. Call us today at (330) 823-8400 or click on schedule an appointment below.