As promised last week, get ready for business talk! Come on, you know it’s your favorite part of the holiday season.

In that previous blog, I wrote about how the state of our economy is causing more and more individuals to act like a business. At some point, though, it ends up making more sense to become an actual business. So this time I wanted to talk about the different forms a business can take. Each of these come with different tax considerations (which is too in-depth, and most likely too boring, to fully go into here), so that is something we should talk about if you are thinking about setting up a new venture.

First, there is being a sole proprietor. This is when you are in business for yourself, but have not actually incorporated your business.

Then, there is a partnership, which is exactly like it sounds. This is a group where everyone involved contributes something to the business. This can be money, property, labor, skills, etc., with the key being that everyone expects to share in the profits and losses of the business. The partners are not employees, but the profits or losses from the venture are passed through onto their tax returns.

A corporation is what one tends to think when thinking of larger businesses. In this case, shareholders exchange money and/or property for stock in the corporation. The corporation then realizes net income or loss, pays taxes, and distributes profit to its shareholders.

S corporations are corporations that pass their income, losses, deductions, and credits through to their shareholders. Those shareholders report this on individual tax returns, and pay individual income tax rates on it.

Finally, a limited liability corporation is a business structure that has slightly different rules depending on what state it is in. Owners in an LLC are called “members,” and this can include anywhere from one owner to many. Within there, the LLC can be treated as a corporation, partnership, or as a part of the owner’s tax return by the IRS.

If that sounds like it can be a little all over the place, that’s because it can, but there are great benefits of forming an LLC.  The biggest of these is that it separates one’s personal assets from that of a business, making one not personally responsible for the debts and liabilities of the business.

In fact, all of these forms have benefits when used in the correct situations. Of course, that also means that there are drawbacks when not correctly used for a specific situation. This can also be intimidating because it is something that many do not even know they have to think about until it is time to think about it. When done correctly, though, it helps protect your interests and can put you in the best spot to have the biggest initial advantage when it comes to paying taxes. So when I said last week that it is good to sometimes think like a business, it is also good to sometimes become a business. And if you need some guidance with that, do not hesitate to reach out to us.