Let’s face it – we all want to own a business, choose our own hours and not have to listen to anyone tell us what needs to be done. Before the internet, starting a business was a real pain. The operating costs were too high. For example, if you were to open a store, you had to pay rent, electricity, sewage and everything else that relates to having a physical location for a business. Now you can have a booming business right from your home. Whether you provide consulting, writing service or have a big online store, the operating costs can be cut in half. Besides, it’s always good to have a business structure in place to look professional to your potential customers and clients.

This post will highlight pros and cons of different business structures. Along with pros and cons we will also provide you with forms that you need for each of these business structures and where you can download them. All in all, this post is your one stop guide to choosing a business structure. Don’t believe us? Keep on reading. Ohh and if you are asking why we are covering entrepreneur’s guide on a job search blog, here is a little known fact – some of the most successful entrepreneurs started their business after they got laid off from their day jobs. Take that as an inspiration. Let’s begin.

Sole Proprietorship

Pros

• Easiest and cheapest form of business structure
• Keep or reinvest income as you please
• Complete control of business
• Easy to dissolve

Cons

• Responsible for all debts related to the business
• Hard to acquire employees of higher quality at times
• Often limited to using funds from personal savings and loans
• Some employee benefits not directly deductible from business income

Federal Tax Forms

• Form 1040 : Individual Income Tax Return
• Schedule SE : Self Employment Tax
• Form 4562 : Depreciation and Amortization
• Form 1040-ES : Estimated Tax For Individuals
• Schedule C : P&L From Business (or Schedule C-EZ)
• Form 8829 : Expenses For Business Use Of Your Home
• Employment Tax Forms

Partnership

Pros

• Easy to establish. Caution should be taken when creating partnership agreements
• Shared responsibilities and work
• Increased possibility in raising funds
• Mutual support and motivation

Cons

• Profits must be split among partners
• Shared decisions can lead to disagreement and cause problems
• Limited life. May end upon the withdrawal or death of a partner
• Partners are jointly liable for the actions of other partners

There are 3 types of Partnerships. Explained in bullet points below

1. General Partnership
   • Partners divide responsibility for management and liability
   • Partners divide shares of profit and loss according to the agreement
   • Does not have limited partners
2. Limited Partnership
   • Most partners have limited liability (to the extent of their investment)
   • This form of partnership is more complex in nature
   • A limited partner has limited input regarding management decisions
3. Joint Venture
   • Acts like a General partnership but for a limited period of time
   • Is generally used for a single project and short term project

Federal Tax Forms

• Form 1065 : Partnership Return Of Income
• Form 1065 K-1 : Partner’s Share of Income, Credit, Deductions
• Form 1040 : Individual Income Tax Return
• Form 4562 : Depreciation
• Schedule E : Supplemental Income and Loss
• Schedule SE : Self Employment Tax
• Form 1040-ES : Estimated Tax For Individuals
• Employment Tax Forms

Corporations

Pros

• Shareholders have limited liability for the debt or judgement against the corporation
• Cost of benefits provided to employees can be deducted
• Funds can be raised through the sale of stock
• Shareholders can be held accountable only for their investment in the stock of the company
• Can elect as S Corporation status if certain requirements are met
• If elected as S Corporation, can be taxed similar to a partnership

Cons

• Requires more time and money to form a corporation
• Monitored by Federal, State and some local agencies
• May result in higher overall taxes
• Dividends paid to shareholders are not deductible from business income

Federal Tax Forms

• Form 1120 or 1120-A : Corporation Income Tax Return
• Form 8109-B : Deposit Coupon
• Form 1120-W : Estimated Tax for Corporation
• Form 4562 : Depreciation
• Employment Tax Forms

Other forms as needed

• Capital gains
• Sale of assets
• Alternative minimum tax, etc.

Subchapter S Corporation

Pros

• Personal assets will not be at risk because of the activities or liabilities of the S corporation
• Generally will not have to pay corporate level income tax
• Has no corporate Alternative Minimum Tax (AMT) liability
• FICA tax is not owed on the regular business earnings of the corporation, only on salaries paid to employee

Cons

• Cannot have more than 35 shareholders (Husband & wife are considered one shareholder)
• Non resident aliens, corporations and most estates and trusts cannot be shareholders
• Must operate on a calendar year

Federal Tax Forms

• Form 1120S: Income Tax Return for S Corporation
• 1120S K-1: Shareholder’s Share of Income, Credit, Deductions
• Form 1040: Individual Income Tax Return
• Form 4562 : Depreciation
• Schedule E: Supplemental Income and Loss
• Schedule SE: Self-Employment Tax
• Form 1040-ES: Estimated Tax for Individuals
• Employment Tax Forms

Other Forms as Needed

• Capital gains
• Sale of assets
• Alternative minimum tax, etc.

Limited Liability Company (LLC)

Pros

• Members are not responsible for any legal judgement against the company
• Owner can choose a tax arrangement as a sole proprietorship, a partnership, an S corporation or a C corporation.
• Does not have to have annual shareholder meetings or a board of directors like a Corporation
• If one of the members of the LLC passes away, the company can continue
• Much less paperwork or record keeping compared to traditional corporation
• Allows flexible distribution of profit and losses

Cons

• Some states charge LLCs a franchise tax
• Can be difficult to raise financial capital
• The members of the LLC cannot be paid wages
• Manager’s share of the profits is subject to self-employment tax
• Investors don’t feel comfortable investing in a company without shareholders or a non-incorporated business.

Federal Tax Forms

• Generally Taxed as Partnership
  • Form 1065 : Partnership Return Of Income
  • Form 1065 K-1 : Partner’s Share of Income, Credit, Deductions
  • Form 1040 : Individual Income Tax Return
  • Form 4562 : Depreciation
  • Schedule E : Supplemental Income and Loss
  • Schedule SE : Self Employment Tax
  • Form 1040-ES : Estimated Tax For Individuals
  • Employment Tax Forms
• If there are more than 2 of the 4 corporate characteristics corporation forms must be used
  • Form 1120 or 1120-A : Corporation Income Tax Return
  • Form 8109-B : Deposit Coupon
  • Form 1120-W : Estimated Tax for Corporation
  • Form 4562 : Depreciation
  • Employment Tax Forms
  • Other forms as needed : Capital gains, sale of assets, alternative minimum tax, etc.

If you would like to add more to this guide feel free to do so in the comments section.

note : If you are looking for government and business forms, visit forms.gov.

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