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Sole Proprietorship:

Tax Treatment:

The business income and expenses are reported on the owner's personal tax return (Form 1040) using Schedule C.

Self-Employment Tax:

Owners are also responsible for self-employment taxes (Social Security and Medicare) on their business income.

No Separate Tax Entity:

The business is not a separate legal entity for tax purposes, meaning the business debts are the owner's debts.

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Partnership:

Tax Treatment:

Similar to sole proprietorships, partnerships are also pass-through entities.

Reporting:

Each partner reports their share of the partnership's income and deductions on their individual tax returns.

Form 1065:

Partnerships file Form 1065, U.S. Return of Partnership Income, to report the partnership's income and deductions.

Schedule K-1:

Each partner receives a Schedule K-1, which shows their share of the partnership's income, credits, and deductions.

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Corporation:

Tax Treatment:

Corporations are separate legal entities and pay taxes on their profits at the corporate level.

Double Taxation:

Profits can be taxed twice: once at the corporate level and again when profits are distributed to shareholders as dividends.

Form 1120:

Corporations file IRS Form 1120 to report their income and deductions.

S Corporation:

Some corporations can elect to be taxed as S corporations, which are also treated as pass-through entities.

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Limited Liability Company (LLC):

Tax Flexibility:

LLCs can be taxed as sole proprietorships (single-member LLC), partnerships (multi-member LLC), or corporations (single or multi-member).

Single-Member LLC:

By default, a single-member LLC is treated as a sole proprietorship for federal income tax purposes.

Multi-Member LLC:

Multi-member LLCs are generally treated as partnerships unless they elect to be taxed as a corporation.

Pass-Through Taxation:

Similar to sole proprietorships and partnerships, LLCs can be taxed as pass-through entities, meaning business income and deductions are passed through to the members' personal tax returns.

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Your business might need to pay state and local taxes. Tax laws vary by location and business structure, so you’ll need to check with state and local governments to know your business’ tax obligations.

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Manage your business - Small Business Administration

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Manage your finances Maintaining proper bookkeeping can help keep your business running smoothly. Hire and manage employees Set up a basic payroll structure and understand general state and federal labor laws. Pay taxes Your business will need to meet federal, state and local tax obligations to stay in good standing. Stay legally compliant Your legal […]

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Summary of Business Structures' Lifespans

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Summary of Business Structures' Lifespans

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Summary of Business Structures' Lifespans

A sole proprietorship's existence is directly linked to its owner.

The lifespan of a partnership can be determined by its agreement or circumstances such as a partner leaving.

A corporation enjoys a perpetual lifespan.

An LLC may have either a perpetual life or a specified duration, contingent upon state laws and its operating agreement.

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The business's lifespan is directly tied to the owner's life or ability to continue operating.

If the owner dies, the business typically ceases to exist unless provisions are made for its continuation or sale.

It's the simplest form of business ownership, with the owner and business considered one entity.

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Partnership:

The lifespan of a partnership can be defined in the partnership agreement or until a dissolution event occurs, such as a partner's death, withdrawal, or bankruptcy.

If the partnership agreement doesn't specify a duration, it can be terminated by any partner's decision to withdraw.

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Corporation:

A corporation is a separate legal entity, meaning it has a life independent of its owners or shareholders.

The corporation can continue to exist even if ownership changes or if shareholders die or leave.

This "perpetual life" is a key advantage for raising capital and ensuring long-term business continuity.

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LLC (Limited Liability Company):

An LLC is also a separate legal entity, like a corporation, but with more flexibility in its structure and operation.

The lifespan of an LLC can be perpetual, or it can be for a fixed period, depending on the state and the operating agreement.

In many states, an LLC can continue to exist even if a member dies, becomes incapacitated, or leaves, as long as the remaining members agree to continue the business.

However, some states may require LLCs to dissolve if there are no members, unless the operating agreement specifies otherwise.

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Liability insurance is crucial for all business structures, but its importance and the type of coverage needed vary significantly depending on whether you operate as a sole proprietorship, partnership, corporation, or LLC

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Liability insurance is essential for every type of business structure. However, the significance and specific type of coverage required differ greatly based on whether you run a sole proprietorship, partnership, corporation, or LLC.

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Ease of Entry: Extremely easy; you can start a business without formal legal action through the state.

Formality: No need for a board of directors or a separate business bank account.

Considerations: You are personally liable for business debts and obligations.

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Ease of Entry: Relatively easy, similar to a sole proprietorship, but involves an agreement between two or more individuals.

Formality: Requires a partnership agreement outlining responsibilities and liabilities.

Considerations: Partners are generally personally liable for business debts and obligations.

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Ease of Entry: More complex than sole proprietorships or partnerships, requiring state filings and compliance with regulations.

Formality: Requires a board of directors, bylaws, and ongoing compliance with state and federal regulations.

Considerations: Corporations offer limited liability to owners, but are subject to double taxation (corporate and personal).

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When starting a business, it is essential to choose the type of business entity you want to create. This choice will dictate the specific income tax return form that you will need to submit. The most prevalent types of business entities include sole proprietorships, partnerships, corporations, and S corporations. Additionally, a limited liability company (LLC) is a business structure permitted by state law. When selecting a business structure, it is important to consider both legal and tax implications.

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When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a business structure allowed by state statute.

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Ease of Entry: Easier to form than a corporation, but requires state filings and ongoing compliance.

Formality: Requires an operating agreement, but less formal than a corporation.

Considerations: LLCs offer limited liability to owners and can be taxed as a pass-through entity (like a sole proprietorship or partnership) or as a corporation.