Business Formation

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 form of business are the sole proprietorship, partnership, corporation and S corporation. Limited Liability  Company (LLC) is a relatively new business structure allowed by state statute.  Legal and tax considerations enter into selecting a business structure.

 

Here is a brief introduction to the business structures:

 

Sole Proprietorships

 

A sole proprietor is someone who owns an uinicorporated business by himselff or herself.  However, if you are the sole member of a domestic limited company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.

 

Some of the forms at the Federal Level that you may have to file are:

  • Income Tax Form 1040 and Schedule C, Profit or Loss from Business
  • Self-employment tax, Schedule SE (Form 1040)
  • Social Security and Medicare taxes and income tax withholding, Form 941 Employer's Quarterly Federal Tax Return or Form 943 Emplouyer's Annual Federal Tax Return for Agricultural Employees or Form 944 Employer's Annual Federal Tax Return.
  • Providing information on Social Security and Medicare taxes and income tax withholding, Form W-2, Wage and Tax Statement and Form W-3, Transmittal of Wage and Tax Statements.
  • Federal Unemployment (FUTA) tax, Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.
  • Filing information returns for payments to nonemployees and transactions with other persons, Form 1099 Misc., Miscellaneous Income.
  • Excise Taxes, Taxes paid when purchases are made on specific good, such as gasoline, which are often include in the price of the product.  There are also excise tax on activities, such as on wagering or on highway usage by trucks. 

At the State Level also you could have to file certain reports. Some of the most common reports are:

  • Sales and Use Tax Return, Form DR-15 used to report monthly or quarterly sales of tangible goods and also for certain activities such as commercial rent.
  • Ree-employment Tax Return, Form RT-6 (formerly UCT-6, unemployment tax) 
  • Solid Waste and Surcharge Return, For DR-15SW used to pay taxes and fees on: 
    • Rental Car surcharge
    • Lead-Acid Battery fee
    • New Tire fee
    • Tax on Dry Cleaning/Laundering
  • Depending on the activity, others taxes administered by the Florida Department of Revenue may apply.

 

Partnerships

 

A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

 

A partnership must file an annual information return to report the income, deductions, gains, losses, ets. from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.

Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed.

 

If you are a partnership or a partner (individual) in a partnership, you may be required to file some of the followin forms:

 

At the federal level

  • Annual return of income, Form 1065 U.S. Return of Partnership Income.
  • Employment taxes. Form 941 Employer's Quarterly Federal Tax Return and Form 943 Employer's Annual Federal Tax Return for Agricultural Employees
  • Form 940 Employer's Annual Federal Unemployment (FUTA) Tax Return
  • Excise Taxes (refer to the explanation on this taxes for sole proprietor above)

 

At the state level

  • Form F-1065 Florida Partnership Information Return
  • Same required forms as detailed above for sole proprietor

 

At the individual level, individual partners in a partnership may file:

  • Income Tax, Form 1040 Individual Income Tax Return  and 

        Schedule E (Form 1040) Supplemental Income and Loss

  • Self-employment tax, Form 1040 U.S. Individual Income Tax Return and Schedule SE (Form 1040), Self-Employment Tax.
  • Estimated Tax, Form 1040-ES Estimated Tax for Individuals.

 

Corporations

 

In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. a corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also takes special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

 

The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributres dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

 

Some forms that a corporation may be required to file are:

 

  • Income Tax, Form 1120 U.S. Corporation Income Tax Return
  • Estimated Tax, Form 1120-W Estimated Tax for Corporations
  • Employment Taxes, Form 941 Employer's Quarterly Federal Tax Return or Form 943 Employer's Annual Federal Tax Return for Agricultural Employees
  • Form 940 Employer's Annual Federal Unemployment (FUTA) Tax Return
  • Form 8109 Federal Tax Deposit Coupon
  • Excise Taxes (refer to the explanation on these taxes for sole proprietor above)
  • At the state level some reports are required in the same manner than sole proprietors.

 

S Corporations

 

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through ofr income and losses on their personal tax retrurns and are assessed tax at their individual income tax rates.

This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

 

To qualify for S corporation status, the corporation must meet the following requirements:

  • Be a domestic corporation
  • Have only allowable shareholders
  • including individuals, certain trusts, and estates and
  • may not include partnerships, corporations or non-resident alien shareholders
  • Have no more than 100 shareholders
  • Have only one class of stock
  • Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

 

Some forms that a corporation may be required to file are:

  • Income Tax, Form 1120S U.S. Corporation Income Tax Return 
  • Form 1120S Sch.K-1 Shareholder's Share of Income, Deductions, Credits, etc.
  • Estimated Tax, Form 1120-W Estimated Tax for Corporations
  • Employment Taxes, Form 941 Employer's Quarterly Federal Tax Return or Form 943 Employer's Annual Federal Tax Return fro Agricultural Employees
  • Form 940 Employer's Annual Federal Unemployment (FUTA) Tax Return
  • Form 8109 Federal Tax Deposit Coupon
  • Excise Taxes (refer to the explanation on these taxes for sole proprietor above)
  • At the state level some reports are required in the same manner than sole proprietors.

 

Limeted Liability Company (LLC)

 

A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, and you should check with your state if you are interested in starting a Limited Liability Company.

 

Owners of an LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members.  Most states also permit "single-member" LLCs, those having only one owner.

 

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state's requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.

 

LLCs Classifications

Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC's owner's tax return (a "disregarded entity"). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. And an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.

 

Filing requirements

 

As early mentioned, depending on elections made by the LLC the filing requirements will adopt either of the entities above described:

 

1.-An LLC with only one member that did not elect to be treated as a corporation will file as a sole proprietorship as follow:

  • Income Tax Return, Form 1040 and Schedule C, Profit or Loss from Business 
  • Self-Employment Tax, Sch. SE (Form 1040)

2.- An LLC with more than one member that did not elect to be treated as a corporation will file as a partnership as follow:

  • Annual return of income, Form 1065 U.S. Return of Partnership Income
  • Generally, members of LLCs filing Partnership Returns pay self-employment tax on their share of partnership earnings, Sch. SE (Form 1040).

3.- If the LLC is a corporation, normal corporate tax rules will apply to the LLC and it should file a Form 1120. U.S. Corporation Income Tax Return. The 1120 is the C corporation income tax return, and there are no flow-through items to a 1040 from a C corporation return. However, if a qualifying LLC elected to be an S Corporation, it should file a Form 1120S. U.S. Income Tax Return and S corporation laws apply to the LLC. Each owner reports their pro-rata share of corporate income, credits and deductions on Schedulo K-1 (Form 1120S).

Get in Touch With Us.

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Kissimmee, FL 34744

 

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