Since today is the last day for individual Income Tax filing in the USA, I thought I would empty my notebook of tax tips for startups. A lot of you probably also think corporate taxes are due today, but you would be delinquent. The due date for corporate tax returns was last month, March 16th.
Let’s start with the basics for startups. You probably all know that you can set up the legal entity as a sole proprietorship, LLC (Limited Liability Company), S-Corp (Subchapter-S Corporation), or C-Corp (US Corporation).
The sole proprietorship is the easiest and quickest - it can be done online in a few minutes by filling out Form SS-4 to request an EIN (Employer Identification Number). Unfortunately it has the big disadvantage of co-mingling your personal and business assets, meaning you can lose your house if your business is sued. For income tax purposes, a sole proprietorship must use Schedule C as part of personal Form 1040.
An LLC or S-Corp or C-Corp requires several more forms to create, and publication in a newspaper. If you do it yourself, this process will likely take a couple of months and cost a few hundred dollars (much more if you use a lawyer). Each of these three has the great legal advantage of limiting liability to the entity, away from personal assets. A C-Corp is required if you want to issue multiple classes of stock, or plan to have more than 100 shareholders (now is the time to see your lawyer if you want more details).
But you may not know that your startup may default to or be defined as a taxable entity that differs from the legal entity.
For example, an LLC with two or more members (even husband and wife) will default to a partnership for tax purposes, and must file Partnership Form 1065, and report income through Schedule K-1. Form 8832 is optional to confirm the partnership status.
Any LLC or S-Corp can use the Entity Classification Form 8832 to elect to be treated for tax purposes as a sole proprietorship (Schedule C) or partnership (Schedule K). Or any LLC can use Form 2553 Election by a Small Business Corporation to be treated for tax purposes as an S-Corp. Just remember that the tax election never overrides the legal considerations of the original entity above.
Now you may ask why you would want to do one of these transformations for tax purposes – the simple answer is to save on taxes and tax preparation efforts in certain circumstances (and now is the time to see your accountant if you want more details).
There’s no question that the economic crisis has made it that much harder for startups to stay afloat, so it’s critically important that entrepreneurs take advantage of every tax saving opportunity.
I’d like to help. I need your ideas and questions in this area for discussions with experts I know, and future posts. I want to find every incentive for entrepreneurs to invest in ideas, create new jobs, and aid our economic recovery. That’s a win-win for all of us.
Marty Zwilling
Let’s start with the basics for startups. You probably all know that you can set up the legal entity as a sole proprietorship, LLC (Limited Liability Company), S-Corp (Subchapter-S Corporation), or C-Corp (US Corporation).
The sole proprietorship is the easiest and quickest - it can be done online in a few minutes by filling out Form SS-4 to request an EIN (Employer Identification Number). Unfortunately it has the big disadvantage of co-mingling your personal and business assets, meaning you can lose your house if your business is sued. For income tax purposes, a sole proprietorship must use Schedule C as part of personal Form 1040.
An LLC or S-Corp or C-Corp requires several more forms to create, and publication in a newspaper. If you do it yourself, this process will likely take a couple of months and cost a few hundred dollars (much more if you use a lawyer). Each of these three has the great legal advantage of limiting liability to the entity, away from personal assets. A C-Corp is required if you want to issue multiple classes of stock, or plan to have more than 100 shareholders (now is the time to see your lawyer if you want more details).
But you may not know that your startup may default to or be defined as a taxable entity that differs from the legal entity.
For example, an LLC with two or more members (even husband and wife) will default to a partnership for tax purposes, and must file Partnership Form 1065, and report income through Schedule K-1. Form 8832 is optional to confirm the partnership status.
Any LLC or S-Corp can use the Entity Classification Form 8832 to elect to be treated for tax purposes as a sole proprietorship (Schedule C) or partnership (Schedule K). Or any LLC can use Form 2553 Election by a Small Business Corporation to be treated for tax purposes as an S-Corp. Just remember that the tax election never overrides the legal considerations of the original entity above.
Now you may ask why you would want to do one of these transformations for tax purposes – the simple answer is to save on taxes and tax preparation efforts in certain circumstances (and now is the time to see your accountant if you want more details).
There’s no question that the economic crisis has made it that much harder for startups to stay afloat, so it’s critically important that entrepreneurs take advantage of every tax saving opportunity.
I’d like to help. I need your ideas and questions in this area for discussions with experts I know, and future posts. I want to find every incentive for entrepreneurs to invest in ideas, create new jobs, and aid our economic recovery. That’s a win-win for all of us.
Marty Zwilling
Posts
3 comments:
Hey, Fellow Twittererer, LOL!, Cool Website, Just stopping by to say hello, I like the idea of Corportation. I was reading if you register as a Corporation, it is a better benefit than a sole proprietorship. What you say:
Unfortunately it has the big disadvantage of co-mingling your personal and business assets, meaning you can lose your house if your business is sued.
Makes Sense, Marty Zwilling.
I would be interested in learning more, respond to my Youtube channel and leave me a message.
And please, please,
Don't forget to Subscribe, Comment and Leave Me A Message, Because I would like to know more, since I am a start up and not making much money, but when I do, I possibly will need your help.
Thanks,
Ray.
Click on my name, it will be linked to my YouTube Channel.
@Ray, thanks for the positive feedback. Feel free to drop me a line any time via marty@startupprofessionals.com.
For what it's worth, we set up our LLC in Arizona in less than a month. Filed on 12/19, received approval from state on 12/26, filed a pleading in the next week, done. Cost less than $300, no lawyers, just followed a quick step-by-step instruction sheet. YMMV, naturally, but I don't think "a few months" is fair. :-)
Otherwise, great stuff.
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