Start A Business

Step 9: Forms of Business

When beginning a business, you must decide which form of business to use. Legal and tax considerations enter into this decision. Only tax considerations are discussed below. The most common forms of business are the sole proprietorship, partnership and corporation.

• Sole proprietorships. A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence apart from you, the owner. Its liabilities are your personal liabilities and you undertake the risks of the business for all assets owned, whether used in the business or personally owned. You include the income and expenses of the business on your own tax return.
  
  Use a separate Schedule C (Form 1040), Profit or Loss From Business, to report the profit or loss from each business (except farming) you operate as a sole proprietorship. If you have only one business, you may be able to use Schedule C-EZ, Net Profit From Business.
  
  If you are the sole proprietor of a farming business, use Schedule F (Form 1040), Profit or Loss From Farming, to report your profit or loss.
  
  
• Partnerships. A partnership is the relationship existing between two or more persons who join to carry on a trade of business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business.
  
  A partnership is not a taxable entity. Each partner includes his or her share of the income or loss on his or her tax return. Use From 1065, U.S. Partnership Return of Income, to report the profit or loss of a partnership.
  
  
• Corporations. In forming a corporation, prospective shareholders transfer 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 take special deductions.
  
  The profit of a corporation is taxed to both the corporation and to the shareholders when the profit is distributed as dividends. However, shareholders cannot deduct any loss of the corporation.
  
  Most corporations file Form 1120, U.S. Corporation Income Tax Return or Form 1120-A, U.S. Corporation Short-Form Income Tax Return.
  
  
• S corporations. An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation. An S corporation may also be exempt from federal income tax. Its shareholders include on their tax returns their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss.
  
  A corporation elects to be treated as an S corporation by filing Form 2553, Election by a Small Business Corporation.
  
  An S corporation files its return on Form 1120S, U.S. Income Tax Return for an S Corporation.