Choice of Business Entity Taxpayers often need to choose a form for a business entity. Both tax and non tax factors should be considered. Tax factors that you might consider are: -Sole Proprietorship: Operate as conduits and tax the individual owner on the income of the business. The mechanism to accomplish this is Schedule C of Form 1040. Because sole proprietorships are not separate taxable entities, they may not deduct owner-employee salaries and owner-employee fringe benefits. Additionally, a cash withdrawal from a sole proprietorship has no tax consequence because the only entity involved are individuals. Cash draws are analogous to taking money from one pocket and putting it into another pocket in the same pair of pants. Sole Proprietorships provide no legal protection against liability, so the owner should consider another form of organization if the business grows. -Partnership: Like sole proprietors, partners pay tax on their share of the partnership income. Income is tax at the owner level rather than at the entity level. Any items that receive special treatment at the individual level must be reported separately to each partner by preparing Schedule K-1 of Form 1065. A partnership offers flexibility in allocation income and expenses among the partners. At least one partner must serve as a general partner that is personally liable for business debts.

-S Corporation: The S Corporation retains the legal characteristics of the corporate form, while obtaining taxation characteristics similar to those of a partnership. No more than 75 shareholders may participate in ownership, and only individuals, estates and certain trusts can be shareholders. This entity provides corporate protection against personal liability against all owners. One advantage of an S Corporation is that it can pay deductible salaries to owner/employees. That makes it easier than with a partnership to allocate income to persons who are active in the business. -C Corporations: Are taxable entities that are separate and distinct from their owners. A corporation pays tax on its income. The results of operations are reported of Form 1120. Because the corporation is separate from its shareholders, it can employ shareholders and pay them salaries or wages. The ability to pay deductible salaries to owners, combined with the differences in the individual and corporate tax rate provides the opportunity to lower the total tax liability of the business. Double taxation often occurs in a C Corporation business: Business income of a regular corporation is first taxed, then this income is taxed again when distributed to its owners.

Using the internet to cut business taxes The internet lets many formerly local businesses make sales nationwide-even worldwide. With these opportunities comes the risk that a company may open itself to tax in states, or countries, where it never had to pay tax before. The rule is that businesses must pay income tax and collect sales and use tax in any state in which they have physical presence. A firm can make sales in a distant state without collecting sales and use tax there if it takes care to avoid having any presence in the state that could be subject to tax. Presence that may lead to tax liability within a state includes: -Locating a computer server in the state to speed customers' internet connections -Employing a telecommuting employee there -Employing a product services agent in the state -Having a location in the state that accepts product returns -Maintaining local inventory stocks to shorten local delivery times

Owner's Checklist for Starting a New Business Background work - assess your strengths and weaknesses - establish business and personal goals - assess your financial resources - identify the financial risks - determine the start-up costs - decide on your business location - do market research - identify your customers - identify your competitors - develop a marketing plan

Business transactions - select a lawyer - choose a form of organization (proprietorship, partnership, or corporation, for example) - create your business (register your name, incorporate the business, etc.) - select an accountant - prepare a business plan - select a banker - set up a business checking account - apply for business loans - establish a line of credit - select an insurance agent - obtain business insurance

First steps - get business cards - review local business codes - obtain a lease - line up suppliers - get furniture and equipment - obtain a business license or permit - get a federal employer identification number - get a state employer i.d. number - send for federal and state tax forms - join a professional organization - set a starting date

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