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Just what kind of business are you running anyway?

July 08, 2009

Just like the guy who learned in high school that he had been writing prose all along, everybody who has a business has chosen an entity, whether they know it or not.
With rare and specialized exceptions, your business will be one of these, as far as the tax law is concerned:

	
•	Proprietorship 
•	Partnership
•	S corporation 
•	C corporation

Wait a second - where are LLCs? Limited liability companies, a relatively new critter in the business world, are chameleons. They can be any of these four things (but they usually are proprietorships when they have one owner and partnerships if there are multiple owners).

The first proprietorship came into business the first time a caveman traded a nice sharp rock for a mastodon burger. If you do business by yourself without the benefit of a state law organization, you are a sole proprietor. Most sole proprietorships report their earnings on their individual tax return, Form 1040, by attaching a Schedule C. If you are a farmer, you use Schedule F. If you are renting real estate, you use Schedule E.

Which entity is best? That's a discussion to have with your tax advisor. If you don't know what to do, start with the partnership or proprietor formats; if nothing else, they are the easiest formats to change. C corporations are the only ones that can cause your income to be taxed twice -- when earned and when distributed -- so make sure you really know what you're doing before you go that way.

Next: Keeping books and records

While the Tax Update takes its summer vacation, we are serializing my chapter in "How Business Gets Done: Words of Wisdom by Central Iowa Experts." You can buy your own copy at Lulu.com by clicking on the link.

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