So you want to start a business, well what do you do?

So…. You wanna start your own business ehh?

Starting a business can be one of the scariest things any adult person can do (aside from having kids and getting married) but what makes it most compelling is being your own boss! I mean, who the hell doesn’t want to say that they don’t report to any one and rack in a ton of cash.

Well to get started you have to do intensive research as to what business structure works best for you, Companies have many different structures: sole proprietorship, corporation, LLC and more. The type of business you select will have an enormous effect on how you are taxed and what taxes you will pay. So before you jump in to anything its best to weigh in your pros and cons depending on what you actually need.

Business structures are commonly known as pass-through entities. That means they don't pay income tax; instead, all the money they earn is passed through to you, which in return you then have to pay income tax on the money you earned through your business.

The only way around paying income tax on your own is by forming a C corporation, which is legally considered to be a separate entity from its owners and pays taxes itself. The biggest catch, tax wise with setting up a C corp is that you have to end up paying taxes twice. You first have to pay corporation taxes on the revenue your business has made, and then you pay individual taxes on whatever money you took out of the business. The Pro to a C corp is that they get to deduct business expenses, which helps to cut back on their tax liability.

If you would like to go an easier route and you intend on staying a much smaller single owned business then a sole prop is the best way to go. If you technically started a business and never formally formed anything legally then you're automatically running a sole proprietorship unless you go through the process of converting to another business structure. Usually as a Sole Prop you have to either file a schedule C or if not then you should at least file estimated quarterly taxes to the IRS. Sole Props also have to pay self-employment taxes on their income which unfortunately means you miss out on some of the tax breaks that owners of other business structures enjoy, but their tax setup is as easy as it can get for a business owner.

Businesses that have more than one owner are then considered partnerships, but like other “pass-through” entities they don't pay taxes themselves. Partnerships file a tax form called Form 1065 which alerts the IRS to how much money they can expect the partners to report on their own tax returns. Form 1065 is a lot more complicated than the Schedule C that Sole Props usually file, so if you choose to go with this type of business structure you should immediately get yourself a good accountant that handles businesses. Like sole props, partnerships pay self-employment taxes on all the income they received from the business and pay estimated quarterly taxes.

Now for the magical and common LLC (Limited Liability Company). This structure requires much more work than the previous others. At minimum, setting up an LLC requires you to file Articles of Organization with the state you would like to form in.Every state works differently so depending on where you are, you may have much more paperwork to deal with, such as operating agreements and permits. By default, LLCs are treated as partnerships meaning that they file Form 1065; but you can also file a request with the IRS to be taxed as an S Corporation, C Corporation or sole proprietor instead.

S Corps are designed for small businesses. S corps are still considered “pass-through” entities, so they avoid the double-taxation that apply to a C corp. S Corp structures allow the owners to pay themselves “distributions” for lack of a better term basically they allow you to take payouts. Now just because you can take a distribution does not mean you can take your entire payout. The IRS requires that you to pay yourself a “reasonable” salary and you'll still have to pay self-employment taxes on that money that is distributed.

Some states don't recognize the S Corp structure and will require you to pay your state taxes as though you owned a C corp. S corps file Form 1120S with the IRS, and also have to pay estimated quarterly taxes.

In my honest opinion you should not stray away from starting off as a Sole Prop, a common mistake that first time business owners make is that they come up with what they think is a great idea and jump immediately in to an LLC or Corporation. What you can do is start as a Sole Prop and once you start seeing that the business is big enough to be worthwhile (making over 45,000 a year) then you can explore your other options of formation. This will allow you to avoid the hassle and expense of setting up a more complicated structure while you wait to see if the business will turn a profit.

Hope this helps and I wish you the best of luck with your business endeavors!