paystubmakr.com presents the article about Business Forms & Characteristics
There are a few possibilities for a starting company to select legal structures it should use for its organization. The same way an existing business may find the best to change structures. There are pro and cont to any structure. However, in examining corporations, the reader should have at least a general concept of the alternatives. The following discussion is not a thorough discussion of the tax or business aspects of the business types mentioned. Only the general “all-encompassing” concepts of each will be addressed.
Sole Proprietorship (quote from paysubmakr.com)
“Sole proprietorship are the simplest business form since they are not separate tax or legal entities but rather, extensions of the individual taxpayer that owns them. The business has no existence apart from the owner. Its liabilities are the owner’s” personal liabilities. Each asset in a sole proprietorship is treated separately for tax purposes, rather than as part of one overall ownership interest. For example, a sole proprietor selling an entire business as a going concern figures gain or loss separately on each asset.
There is no special return to file for the sole proprietorship. The owner reports all transactions of the business on the owner individual income tax return (i.e., Schedule C, Form 1040).
A sole proprietor is considered self-employed. If a taxpayer is a sole proprietor, there is no tax effect if they take money out of business, or transfer money to or from the business.
If the business form selected is a sole proprietorship, individual income tax rates will apply. Filing a joint return in 2017 are: The tax rates for a couple filing the joint return in 2017 are:
Advantages Quotes from paystubmakr.com
“The advantages of a sole proprietorship are:
(1) Organizational costs should be low;
(2) Legal, accounting, and administrative fees are lower;
(3) State and federal income taxes may be lower; and”
(4) The administration is less complicated.
Disadvantages
The disadvantages of a sole proprietorship are:
(1) Personal liability,
(2) Inability to income split,
(3) Limited fringe benefits, and
(4) Self-employment tax.
Self-Employment Taxes
If a taxpayer is a sole proprietor, they will have to pay self-employment tax (§1401). The self-employment tax is the non-employee portion of the Social Security tax-raising system. In 2017, self-employment tax takes. Quotes from paystubmakr.com
15.3% of income (12.4% for social security [OASDI] and 2.9% for Medicare [HI]) from self-employment. Deductible items like home mortgage interest, real estate taxes, state income tax, Keogh plan or IRA deductions, etc. don’t reduce self-employment tax. However, since 1990, business deductions, plus an amount equal to the self-employment tax on half of the self-employment income, are allowable in reducing the self-employment income.
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In 2017, the social security tax is imposed on the first $127,200 of self-employment income and the Medicare tax is imposed on all self-employment income.
Incorporation
Before 1990, taxpayers could usually save money on this tax by incorporating. As a corporation, any salary paid (up to $48,000 in 1989) was subject to both individual and corporate FICA tax of 7.51% (for a total tax rate of 15.02%) versus a 13.02% rate for self-employment tax. However, the employer half of the FICA tax was all deductible for corporate income tax purposes. This difference disappeared in 1990.
Also, one-half of the self-employment tax has become deductible, both for income and self-employment tax purposes, thus putting self-employed persons on the same footing as incorporated ones for Social Security (FICA) and self-employment) tax purposes.
“S” Solution
One controversial approach to reduce self-employment tax is to set up an S corporation and pay wages less than the amount that would normally be subject to self-employment taxes. This increases the S corporation’s net income, which would pass through to the taxpayer as a shareholder.
Such income could then be distributed as a dividend with only income tax applicable to it (unlike wages or self-employment income, which is subject to both income tax and self-employment tax).
Note: If the wages paid by the S corporation are unreasonably low, the IRS may impute part of the corporate income as additional wages defeating this tactic (§1366(e)).
Estimated Tax Payments
Self-employed persons are also subject to estimated tax payments, which must reflect self-employment taxes as well as federal income taxes. These estimated payments are made quarterly and must equal the lesser of 100% (for some years it has been higher where the taxpayer’s AGI is greater than $150,000) of the prior year’s tax liability or 90% of the current year’s liability in order to avoid the penalties for underpayment of estimated tax by individuals. The federal tax payment must be made with Form 1040-ES by the 15th day of April, June, September and on January 15th of the following year. Any remaining tax due (or refund) is reported on Form 1040, individual income tax return, on the following April 15th.
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Partnerships
A partnership is a relationship existing between two or more persons who join together 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 (Reg. §1.761-1(a)).
For income tax purposes, the term “ partnership” includes a syndicate, group, pool, joint venture, or other unincorporated business that is carrying on a business and that is not classified as a trust, estate, or corporation (§761; Reg. §1.761-1(a)).