The default legal identity for the vast majority of Freelance business consultants, the Sole Proprietorship is an extension of the owner and is not a separate legal entity. It is possible to use a separate business name (dba = doing business as) when operating as a sole proprietor—registering with the state and /or city can be a good idea—and it’s also possible to obtain from the IRS a separate business tax ID (Employee Identification Number, or EIN) and open a business bank account, both of which are recommended. Sole Proprietorship offers no liability protection.
The tax return filed is your own. Since there will be business expenses, you will file schedule C along with 1040. Deduct the portion of your home used for business on form 8829 Use of Home for Business. See your P & L for the numbers to use for schedule C business deductions.
Quarterly estimated taxes must be paid on the 15th of January, June and September along with the annual filing on April 15. Remember to file the self employment tax schedule SE in April.
SMALL BUSINESS CORPORATION
To form an S Corporation is to create a separate legal entity for your business. You must file articles of incorporation; write by-laws for the corporation; and elect a board of directors and officers. It is furthermore required that annual meetings of corporation shareholders and directors be held and official minutes for all corporation meetings be written and retained.
To set up an S Corp. choose a name for your business (check the name availability on your state website), get an EIN number and call the Secretary of State’s office to receive filing instructions. The fee is about $275, paid annually. It is recommended that you trademark your business name.
This is a relatively new form of corporate status. As in the standard corporation, called the C Corporation, owners and shareholders in the business are issued stock (of one class only).
To operate as an S Corp., certain conditions must be met: the business must be a small business, must be based in the US, may consist of 1 to 100 shareholders only and no shareholder can be a nonresident alien. Business owners and the business will have limited protection from liabilities, providing that no owner has been proven to be negligent. If an owner is proven to be personally negligent, the owner will be held personally liable.
The tax return filed is the owner’s form 1040, along with schedule E (due April 15) plus form 1120S (due March 15). As with any business, quarterly estimated taxes must be paid, in this case using form 1120W. Shareholders file schedule E along with their form 1040. There is no separate corporate tax.
If this is the business entity that you elect, be careful to meet and maintain all of the conditions. Meaning, even if you are the sole owner, you must still hold annual meetings and write and retain minutes. Failure to meet these conditions can cause you to lose the tax advantages of S Corp. status and the business will be re-classified as a C Corporation.
Known as the C Corporation, this is the granddaddy of separate business entities. C Corp. status offers more protection against liability than any other business entity. If you run a large business, if your business has locations in more than one state, if the business is expected to be very long lived and/or if the business could be subject to significant liability, it is worthwhile to operate as a C Corp.
Stock will be issued (of any class) and stock options can be offered. It is generally easier to raise investment capital, as stock and/or options can be made available. On the downside, a C Corp. has comparatively larger administrative expenses, is subject to more regulatory scrutiny and is taxed at a higher rate.
To do business in this fashion select a name for the business, obtain an EIN number and file articles of incorporation with the Secretary of State for a fee of about $275, paid annually. It is recommended that the business name be trademarked.
Corporation by-laws must be written and a board of directors and officers must be elected. An annual meeting must be held for directors and officers and meeting minutes must be written and retained.
The corporation must file the annual tax form 1120 on March 15, plus estimated taxes on form 1120W on the 15th of April, June, September and December. Business owners file form 1040 with schedule E on April 15 plus estimated quarterly tax payments on the 15th of January, June and September using form 1040–ES.
Next week, I’ll be back with 3 more options for your business legal entity.