You are finally ready to make your dream come true. You are going to open a business in Tallahassee and be your own boss. Unfortunately, becoming a business owner is not as easy as simply hanging an open sign in the window. For instance, if you go into business with a partner, you will have to create an Owner Agreement or Management Agreement that specifies procedures, such operations or what to do if you and your partner cannot agree on a business issue.
Another thing you will have to do is to decide what kind of business entity to create. For example, do you want to operate your business as a limited liability company, a corporation or perhaps a partnership? The type of business entity you choose can affect your personal liability in regard to the company, taxation and even bookkeeping requirements.
If you plan to be the only owner of your business and you want complete control of the company, then a sole proprietorship might be the best option. However, keep in mind that you will be personally responsible for every aspect of the business including financial obligations and self-employment taxes.
If you decide to go into business with someone else, then you may want to form your business as a partnership. With this kind of entity, the profits and losses will pass through directly to your personal tax return. In other words, the partnership will not incur a federal tax liability at the company level. Instead, you and your partner will each be responsible for any taxes as a result of profits according to your ownership percentage.
Many larger companies form as corporations. With this type of entity, the owners are generally separate and not responsible for any obligations of the company. Instead of receiving a direct share of the profits or losses, you would receive dividends. Unfortunately, corporations bring about double taxation. In other words, the company will have to pay taxes on its income and then, you will have to pay taxes on any dividends you receive.
By electing S-Corporation status, you can avoid this double taxation. An S-Corporation has characteristics of both a C-Corporation and a partnership. Like a partnership, the profits or losses will pass to your personal income tax return.
If you are planning to open a business, it is important that you select and entity type that will fit your needs and your plans for the company. If you are unsure what type of entity is best for you, be sure you do your research and perhaps consult with a tax professional to make your initial filings with the state and the Internal Revenue Service go as smoothly as possible.