Free Continuing Education for Small Business
Okay. So we'll go ahead and get started on the PowerPoint presentation. This is Starting a New Business To-Do List. Things I'm going to be talking about today are business structure, entity selection, what would be best for your new business, choosing your new business name and getting licensed with your state, obtaining an Employer Identification Number from the IRS. We'll talk about different accounting methods, cash versus accrual. We'll talk about record keeping and bookkeeping, what the difference is between a business and a hobby in the eyes of the IRS. We'll talk about different types of business taxes and also we'll talk about what it will mean to add an employee to your business as far as record keeping and taxes.
So, the first thing I want to talk about is business structure and the entity selection. When you're starting a new business, one of the first things you need to think about is choosing what kind of entity your business is going to be. You have the following choices for entity selection: you can be a sole-proprietor, an LLC, a partnership, a C corporation or an S corporation.
The easiest entity to set up would just be the sole-proprietor. All you have to do is get a business license and you're good to go. There's no separate tax reporting needed for tax purposes. You'll just file an additional page or two with your personal Form 1040, the Schedule C. So while it's easiest to set-up there's also the drawback of all your profits being subject to self-employment tax which is 15.3%.
So, with a partnership, it's when there are two or more owners sharing in the profits and losses or if you're a multi-member LLC there's no tax at the partnership level so partnership is a flow-through entity. So if you are a partnership or a multi-member LLC you will need to file a separate tax return, Form 1065. However, again, there's no tax at the partnership level. So you will receive a K1 from that Form 1065 and you will record that income on your Form 1040. So each partner will get a K1 and then you'll be taxed at the personal level. Again, all the income from a partnership is going to be subject to that 15.3% self-employment tax, unless you are a passive member of an LLC in which case you may not be subject to self-employment tax.
Next there's the C corporation which is just a regular corporation. When people talk about double-taxation they're talking about a C corporation. Basically with a C corporation you have a separate tax return that you do need to file and you will pay tax at the corporate level. And if you make any dividend distributions to the owners, the owners will again, pay tax on those dividends on the personal level. So that's what people are talking about when they talk about double taxation because a C corporation subjects itself to tax at the corporate level and any dividends are taxed at the personal level.
Last is the S corporation which I was talking about earlier. With the S corporation you avoid that double taxation of the C corporation and you can also potentially save on self-employment tax. Like the partnership, an S corporation is a flow through entity so there's no tax at the corporate level. You'll be taxed at the personal level. That's how you avoid that double taxation. There's no tax at the corporate level.
When we talk about saving on self-employment tax, basically the entire S corporation, the net income that you report on your personal taxes is not subject to the self-employment tax, however, with an S corporation you are required as an owner to pay yourself a reasonable wage. So, let's say your S corporation's looking like it's going to have a net income of $100,000 for the year. Out of that $100,000 you are required to pay yourself a reasonable wage.
So let's say you decided a reasonable wage is $50,000 for the year. You take $50,000 out as a salary. Now you're left with a net income of $50,000. You want to take that money out of the corporation to use personally, you can take that $50,000 out as draws to yourself and it will not be subject to Social Security and Medicare tax. So that's how you can potentially save on self-employment tax as an S corporation.
This is just a quick overview of the different entities that you can choose from when setting up your business. For more information on entity selection, a lot more detail, I encourage you to sign up for John Huddleston's webcast entitled LLCs and S Corporations Explained: Using them to Reduce Taxes. You can sign up for that at smallbusinesswebcast.com. He goes into a lot more detail about the different entities and about how S corporations can potentially save you money.
One other note, I forgot, at the end of this presentation we will be e-mailing you a copy of all of these slides, so if you came in late and didn't get all this or can't take notes fast enough, whatever, we will be e-mailing you a copy of all of these slides.
Let's see, in the chat Dennis is asking, "If you are an LLC and elect to be taxed as an S corporation do you still have the same requirements as an S corporation? For example, corporate minutes, an annual meeting, etc.?" That's a good question. I know, if you were an LLC and you are taxed as an S corporation then you have to file the S corporation tax return, but it's just a tax collection. I'm not sure if you're subject to the same requirements as far as corporate meetings an annual meetings since technically you're still an LLC. You're just being taxed as an S corporation. I could look into that further, but I'm pretty sure you're just subject to the rules for tax purposes.