There are different business structures used to accommodate different business needs. A sole proprietor is a one person operation. When the taxes are done everything related to the business profit and loss will be filed under the sole proprietor’s personal taxes. If there are significant losses it could affect shareholders personally as they would be personally liable for the business profit or loss.
Going into business as a Corporation or S Corporation affords some protection from liability, but there are rules and regulations that must be followed to be covered. One of the most important things to consider is the Corporate Book. This is a book filled with documents outlining steps the board or anyone else has taken including opening a bank account for the corporation or buying another business. This book should reflect what the business has done over a specific period of time.
That means the only way you will be able to get the protection is by conducting your business as such. This includes meetings and minutes of those meetings filed in the Corporate Book. In order to be protected by the positive attributes of a corp you must adhere to the rules and regulations. While it offers protection from liability, it’s only good if you actually carry out the functions, otherwise there is no protection.
An S Corporation is a tax designation whereby when you register with the IRS you indicate it will be an S Corporation. The term S Corporation comes from an IRS designation where the profit and loss of the company is filed under your personal taxes. As an S Corporation, you are still responsible for keeping a Corporate Book and all other duties of a corporation.
Going into business as a Limited Liability Company (LLC) has its own set of responsibilities. If there is only one person in the LLC then the business functions a lot like a sole proprietor, with some liability protection. If two or more people are “members” of the LLC, then it operates like a partnership for tax purposes. A Form 1065 Partnership return would be filed. Each member receives a Form K-1 outlining his share of the profit or loss in the business and then files that amount on his personal tax return.
You will need to apply for a Federal ID number which is like the social security number of the business. A sole proprietor doesn’t need a federal ID number and can use his own social security number instead. To apply for a federal ID number go to the IRS website and in the search box type in online federal ID number. Fill out the online application and the number will be issued immediately. Print a copy of the document that lists your federal ID number for future reference.
Kelly Bichard is a trained tax preparer who loves to do taxes. Now I help small businesses get themselves organized in terms of business paperwork and ready for tax season. I do personal and business taxes.