The ownership structure selected depends on the number of owners, the amount of risk (personal and business) you choose to expose yourself to, and the limits that you have placed on your personal liabilities:
Proprietorships. The simplest form of business is the proprietorship, also known as (a/k/a) a sole proprietorship, is a one-person state protected limited liability company in many states, which is a one owner entity representing an extension of the individual with personal assets as well as business assets reachable by creditors. The federal government still considers these businesses as disregarded entities and so they must be reported for income tax purposes as Schedule C proprietorships paying Schedule SE self-employment taxes. SE taxes consist of the quarterly reported federal income taxes, BOTH the employer and employee shares of the social security and Medicare taxes due. Owners may make withdrawals of assets such as cash, supplies, or equipment, but these draws take the assets out of the business, and are non-taxable as income unless they consist of values greater than the basis in such assets. Basis is the fair market value (fmv) of the assets invested in the business. So, if you take out more than the fmv of the asset as a draw, then the difference is taxable to the owner.
The proprietor may choose to register with the state as a limited liability company or LLC to get state protected against some personal liability if their state(s) of registration allow these hybrid elections. The LLC registration only provides a limited amount of personal liability protection in the state(s) in which the business is registered, so if the business operates in multiple states especially such as a remote business, owners might want to consider a different form of ownership such as an S-Corporation (S-Corp) or a limited liability partnership (LLP). One-person LLCs are considered disregarded entities for federal income tax purposes, so owners report their operations on a Schedule C, with SE taxes on a Schedule SE, on their personal income tax returns.
The business is liable for employment taxes and running workers through a payroll if employees. There are reporting requirements for contractors as well. The owners are never employees of a proprietorship because they are compensated by their taxable net income of the business directly and any possible draws of assets beyond their basis. The business could be liable for other taxes such as sales & use, tariffs, and property, depending on the nature of their operations.
Proprietorships may elect to become one-person limited liability companies (LLC) or to incorporate if their states allow such elections. The one person LLC is a disregarded entity for federal income tax purposes, so the net operations of the business would still be reported on a Schedule C, and the employment taxes still calculated on a Schedule SE, on the owner's personal Form 1040 income tax return. If the owner is registered with the state as a one owner corporation, then the owner could elect to be treated as an S-Corporation (S-Corp) for federal income tax filing purposes. If the owner has morphed into an S-Corp for income tax purposes, however, the owner must pay income through a payroll system instead of reporting self-employment quarterly tax estimates on the net operations of the business, and might consider officially becoming an S-Corp instead of staying a proprietorship for practical reasons
The business is liable for employment taxes if its non-owner workers are employees of the business. The owner is never an employee because the owner must pay estimated tax payments quarterly on self-employment income. There is also reporting required for contractor workers. The business may also be liable for other taxes such as sales & use, tariffs, property, etc., depending on the nature of its operations. Creditors can reach the proprietor's personal assets to satisfy tax liabilities if not complied with through business assets.
Partnerships. A partnership is a business with two or more owners. Like the proprietorship, the owners risk both business and personal assets being at risk to creditors. They pay estimated tax payments including income taxes and SE taxes quarterly, based on their proportion of ownership of the net profit. They file a Partnership income tax return with a K-1 for each owner, and each owner therefore pays income tax and reports special allocations on their own Form 1040 at personal tax rates. Like proprietors, partners can take draws that are only taxable if they exceed the owner's basis in the assets. Also, like proprietors, the partners' personal and business assets are reachable by creditors. Professional liability coverage is still important and can offer additional protection for owners. Owners are liable not only to the extent of their percentage interest in the business, but are jointly and severally liable to creditors to the extent of business assets, and the attachment of personal assets, if obligations are not paid for. There are also risks for activities engaged in by owners. This is where professional liability insurance could afford extra owners protection and "peace of mind".
Partnerships may choose to register with their states as limited liability companies (LLC) or limited liability partnerships (LLP) if their states allow these hybrid elections. The LLC protection from personal liability for the owners only applies to the state(s) in which the business is registered. Professional liability insurance is therefore still important for additional personal protection. If doing business in multiple states or even internationally, owners may consider registering as a corporation with the state(s) of operation, for overall protection against risk. If the partnership elects to become a corporation with their state, then of course they have the option to elect to become or be treated as S-Corps for federal income tax purposes. The difference is that instead of filing a Partnership income tax return with a Schedule K-1 for each owner to declare on their personal Form 1040, they would file a Corporate income tax return. C-Corp returns result in the business paying income taxes at the corporate tax rates, and owners paying personal taxes at the personal rates for Form W-2 compensation and Form 1099 compensation. S-Corp returns result in owners paying income taxes at the personal level for K-1, W-2, and 1099 compensation.
Corporations. Corporations may be registered with the state(s) of inception but the S-Corp election is made at the federal level. Unlike the proprietorship and the partnership, corporations are considered legal "persons" or entities, with an identity completely separate from that of its owners. They are managed by the board of directors and owned by the stockholders (also called shareholders). Some states allow one-person ownership but typically there are multiple stockholders in a corporation. The corporation may contract, sue and be sued, operate, and pay taxes.
The corporation filed a C-Corporation (C-Corp) or a S-Corporation (S-Corp) income tax return. If a C-Corp, the entity pays income taxes based on the net profits of the business at the corporate rates. The owners pay personal income taxes only on their Form W-2 salary income and/or Form 1099-Div income. IF a S-Corp, the owners receive a Form K-1 to report their proportion of the net income (loss) on their individual Form 1040 income tax returns, and possible Form 1099-Div to report as personal dividend income. The owner operators of a corporation are considered employees, along with any other non-owner employees, and must be paid through a payroll system. Contractor reporting is required as well under an accounts payable system.
The stockholders are protected from personal liability for the corporate entity, however officers are liable to pay the trust funds which are the payroll taxes, to the required governmental authorities. The corporation may be liable for other taxes besides employment taxes, such as sales & use, tariffs, property, etc., depending on the nature of its operations.
Not-for-Profits. Not-for-Profit entities (NFPs) are corporate entities formed for a legally recognized purpose and specific type of beneficiaries. The "owners" are actually representatives or administrators of the entities set up to benefit designated beneficiaries. They are not personally liable for the operations of the entity, but again are liable for the trust funds of employment taxes payable to governmental authorities should the entity have employees. If officers or directors, and they violate their fiduciary responsibilities, they could become personally liable for their personal actions done contrary to their fiduciary authority. There is reporting required for contractors. Volunteers however are not paid or reported on the annual income tax Form 990, unless they are highly skilled professionals with a fmv recognized for their services and their offsetting expense. The "owners" of the NFPs do not pay taxes on the income over expenditures (or expenses) of the NFPs unless they are employees receiving W-2 income, but they may also be volunteer workers or Form 1099-MISC (1099-NEC as of tax year 2020) workers of the NFP depending on the nature of their labor
NFPs may be employers and would therefore be liable for employment taxes, with the officers liable for paying over the trust fund taxes to the governmental authorities. The "owners" of the NFPs are otherwise not personally liable for the general operations of the not-for-profit within the scope of their general job activities. The "owners" could be Form W-2 salaried, Form 1099-MISC (1099-NEC as of tax year 2020) contractor paid, non-compensated volunteers, or non-compensated but recognized for their fmv of services if specialized professionals, like other workers depending on the nature of their work relationship with the NFP.
Please bring your financial and payroll reports, entity and personal reports, and registration documents for the initial consultation. Once I assess your documents and expressed needs, then you will upload your documents to your new secure cloud folder. I can prepare a services proposal based on our telephone interview (15 miutes) and the documents that you upload on my encrpyted file exchange to your private cloud folder for my review. You will be offered a subsequent proposed services contract (engagement letter) if you requested this during our telephone interview.
Please allow three to five business days for review of your records and our interview. I will prepare a proposed services contract and send it to printing. You will be informed when the engagement letter has been uploaded to your cloud folder. The engagement pages showing your payment plan selection and signature must be completed and uploaded back to us so that I may start working on your services.
If you do not accept the proposed services contract (engagement letter), then it will not be activated. You may edit the propsal with my assistance and approval for reprinting.