Depending on the nature and business structure, entrepreneurs should become familiar with federal, state and local regulations before establishing their business. It is recommended to seek legal, tax and financial advice before starting a business.
Factors to consider when electing a business structure:
-Capital Investment
-Regulations, permits y licenses
-Complexity
-Flexibility
-Control
-Tax Treatment
-Responsibility
Sole Propritor -
May do business as (DBA) under a trade name.
Application for a Trade Name - Allows the owner to take legal action in case someone else
copies or misuses such trade name.
May register a brand and open a bank account. The owner controls the business and decision-
making.
Advantages - Easy to organize and with minimal costs. May only require to obtain permits and
required state licenses or professional licenses, as applicable.
Disadvantages:
Personal liability for debts and legal claims of the business.
Risk personal assets and business assets.
Difficult to raise capital since there are no partners and stock participations to attract investors.
There is no business continuity in case the owner dies or becomes disabled.
Tax Treatment:
The sole proprietor reports the business gains on his Individual Income Tax Return, Form 1040
using Schedule C.
He/she also must pay Self employment Tax using Schedule SE.
2. LLC (Limited Liability Company) - Publication 3402, Tax Issues on Limited Liability
Companies. Simialr to a Corporation in that owners (members) have limited liability for debts
and actions of the company. May be managed by members or management may delegate one
or more administrators.
Advantages:
Has the advantages of Partnerships where profits and losses are passed-through to their owners.
General rule, require less formalities than corporations. Freedom to manage the company.
Requirements:
a. Te company name must include the following words: ¨Limited Liability Company¨ or
¨LLC.¨ The cost of registration on the Nebraska Department of Estate is $100.
b. Must assign a resident agent who may be a resident or an entity authorized to do business in Nebraska. Must have a physical address in the state.
c. To create, must file a Certificate of Organization with the Secretary of State of Nebraska.
(paper or online) Must contain the name and address of the LLC, the physical and mailing address of the resident agent and must indicate if it is organized to provide professional services, its members, professional employees and persons licensed to practice such profession, as applicable.
d. The state of Nebraska does not require an Operating Agreement but it is recommended to establish the startup, operations and termination of the LLC.
¡ e. Publish a Notice on the conunty newspaper for 3 consecutive weeks (cost depend upon the newspaper)
f. File an affidavit (by mail or online) as proof of te publication with the Secretary of State.
(cost: $10)
g. Apply for an EIN (Employer Identification Number) on the IRS Website.
h. File Biennial Reports with the Nebraska Secretary of State. Due: April 1 for odd years (por
mail o online)
Types of LLCs:
(1) If the LCC has a single member, the IRS automatically treats it as a disregarded entity
unless it files Form 8832 to elect to be treated as a Corporation.
Use form 8829 to deduct expenses for Business use of Home.
Report net gain or loss from LLC operations on Form 1040, Schedule C.
(2) A domestic LLC with at least 2 members is classified by the IRS as a miembros es
clasificada por el IRS como Partnership for tax purposes unless it files Form 8832 and elect
to be treated as a Corporation.
(3) If the LLC elects to be treated as an S Corporation, the laws of S Corp will apply.
The S Corp will report to each owner its share on the corporate income, credits and deductions on Schedule K-1 from Form 1120-S.
(4) If the LLC elects to be treated as a Corporation, the regular Corporation laws will apply.
(5) If the LLC elects to be treated as a Partnership, the Regular Partnership laws will apply.
Must file Form 1065 U.S. Return of Partnership Income. Each partner receives a Schedule K-1 that derives from Form 1065 Partner's Share of Income, Deductions, Credits, etc.
Normally, members of the LLC that file a Return of Partnership must pay
- Self-Employment Taxes for their participation in the partnership's gains.
*For payroll tax purposes and excise taxes, a single member LLC is considered a separate
entity.
*There are certain classification rules as Corporations for certain businesses. (See details)
3. Corporation - Business legal entity that prevents personal liability of shareholders for business
debt. It is managed by the Board of Directors who delegate the daily affairs to the Officers of
the Corporation. Shareholders must observe certain formalities, including stock issuance, held
meetings, record minutes of meetings, elect directors and conduct business by resolution.
It is recognized as a separate taxable entity that is responsible for payment of taxes on corporate
income.
C Corporations may not own stocks in S Corps.
Advantages:
Protection against personal liability for shareholders
Business Continuity and Security
Easy access to capital
Disadvantages:
Requiere formality and protocols
Double Taxation
a. Corporation B - Certified Benefits Corporation - for profit business, structured for the benefit
of society. It is a seal of approval for S Corps and C Corps., certifying they are dedicated (and legally committed) to improve the environment and society.
Requirements to create a Corporation B:
(1) Obtain a score of 80 or higher in the B Impact Evaluation
(2) Report publically the results on BCorporation.net
(3) Make a commitment to consider the organization's stakeholders.
(4) As a Corporation B, it may still maintain its C-Corp or S-Corp status.
b. C Corporation - Regular Corporation.
c. Professional Corporación (PC) o Personal Service Corporation - Some states require that certain professional services that wish to incorporate to hold licenses to practice.
(For example: physicians, attorneys, engineers or accountants). While other states, professionals are alloed to incorporate as a regular corporation.
Limits the personal liability of owners for business debts and claims.
Does not protect against liability due to professional negligence or by an associate.
Tax Treatment for Professional Service Corporations: Publication 542
Most are classified by the IRS as Personal Service Corporations and must file an Income Tax Retun for Professional Corporation. In 2018, all professional corporations paid a flat rate of 21%. They do not pass-through taxes. Disadvantage: double taxation.
May avoid double taxation by electing S Corp treatment.
Form for Corporations
Federal Form: 1120 U.S. Corporation Income Tax Return.
State Form: 1120N Nebraska Corporation Income Tax Return.
Due Date: April 15 of next year following the close of tax year. (for calendar years ending on
December 31) and on the 15th day of the third month following the close of fiscal year
Example: fiscal year ended June 30, 2021, due date is November 15, 2021
Federal Tax Rate 2021: 21%
Nebraska Tax Rate:
Year 2021 Taxable Income Tax Rate:
$0-$100,000 5.58%
>$100,000 $5,580+7.81% from excess of $100,000
Year 2022 Taxable Income Tax Rate:
$0-$100,000 5.58%
>$100,000 $5,580+7.50% from excess of $100,000
4. S Corporation - A corporation or entity that elects to be treated as an S Corp. (Small Business
Corporation) must use Form 2553 to make election under Section 1362(a).
An entity eligible to be treated as a Corporation that comply with certain requirements will be
treated as a Corporation as of the date of efectiveness of the S Corp election and does not need to
file Form 8832, Entity Classification Election.
Tax Treatment:
In general, an S Corporation income is tax to the shareholders instead to the corporation.
Income can be divided between the business and the shareholders, allowing it to be taxed at
different tax rates.
Any income assigned to the owners will be subject to Self-Employment Tax
Dividends from the business will be taxed at its own level. (not suject to Self-Employment Tax)
S Corp owners must be paid a Salary for which they must pay Social Security and Medicare.
Dividend income and remaining gains may flow through to owners but are not subject to Social
Security and Medicare on such funds.
Who is eligible for an S Corp?
(1) A domestic corporation or a domestic entity eligible to elect to be treated as a corporation,
who files Form 2553 on a timely basis and complies with all other requirements mentioned
hereon. (see late elections).
(2) It does not have more than 100 shareholders. You can treat an individual or their spouse (and
their estate) as a shareholder for this test. You can also treat all members of a family
and your equity as a shareholder for this test. For details, see Section 1.131-1(e)(3)(ii). All others
are treated as separate shareholders.
(3) Its only shareholders are individuals, the estate, exempt organizations described in the
Section 401(a) or 501(c)(3), or certain trusts described in section 1361(c)(2)(A).
(4) Has no nonresident alien shareholders (other than potential current beneficiaries
of an ESBT). All shareholders of the S Corporation must be citizens.
(5) It has only one class of action. (not taking into account differences in voting rights)
Generally, a corporation is treated as having a single class of stock if all of the
outstanding shares of the corporation's stock confer identical rights to
distribution and liquidation products.
(6) Is not one of the following ineligible corporations:
(a) A bank or savings institution that uses the reserve method to account for
bad debts under section 585.
(b) An insurance company subject to taxes under subchapter L of the Code.
(c) A domestic international sales corporation (DISC) or former DISC.
(7) Has or is going to adopt or change to one of the following tax years:
(a) Tax year ending December 31.
(b) A calendar business year.
(c) One tax year of ownership
(d) An elected tax year under section 444.
(e) A tax year of 52-53 weeks ending with reference to a named year
(f) Any other tax year (including a 52-53 week tax year) for the
which the corporation (entity) establishes a business purpose.
(8) Each shareholder consents as explained in the instructions for column K.
*A parent S Corporation may elect to treat an eligible wholly owned subsidiary as a qualified subchapter S subsidiary. If the election is made, assets, debts, items of income, deductions, and credits are generally treated as if they were the matrix. Form 8869 Election of Qualified Subsidiary under Subchapter S.
Form for S Corporation:
Form 1120S - document to report income, losses and dividends of the shareholders of the S corporation.
5. Professional Limited Liability Company (PLLC) - Similar to corporation professional, but
with the benefits of an LLC and a more flexible management structure.
Limits liability for business debts but not for negligence claims or malpractice.
6. Partnership - Consists of two or more people doing business as co-owners of a business.
It is recommended to make a Partnership Agreement where the rights and
responsibilities of the partners before starting the business. If not established, the laws of the
state govern aspects of the business.
Follow IRS guidelines for dividing profits and losses disproportionately to interests of the
owners in the business. Publication 541, Partnerships
a. General Partnership - Does not require formal documents to create.
b. Limited Partnership (LP) - Requires submitting a Limited Partnership Certificate. Provides of
limited liability for some of the partners. All partners, limited and general, share the profits of
the business. Interest is not freely transferable.
General partners have unlimited liabilities for the business obligations. Has a right to manage the business and is an agent of the limited partnership. Withdrawal of a general partner may dissolve a limited partnership, absent a contrary agreement of the partners.
Limited partners has liability limited to their capital contribution to the business. Has no righ to manage the business or to act as its agent. Have the right to vote on matters such as admitting new partners.
c. Limited Liability Company (LLP) - a type of general partnership with 2 or more partners,
where every partner has a limited personal liability for the debts of the partnership. Partners will
not be liable for the tortious damages of other partners but potentially for the contractual debts
(See state laws)
Tax Treatment:
The partnership does not pay taxes on income, instead, each partner includes in his
individuals' tax returns, their share of the profits or losses of the society.
Form 1065 Partnership Income Tax Return - To report the participation to partners, but does not
pay taxes. It is an information return. From the 1065, there is a Schedules K-1 for each partner.