Which of These 4 Business Structures Is Best for Your New Business Idea?

One of the first things to consider when starting a business is to determine the legal structure for your business. Your business structure will influence day-to-day operations, liability obligations, and how your business is taxed. Therefore, you should choose a business structure that provides you with both legal protections and benefits.

There are four common business structures: sole proprietorship, partnership, corporation, and limited liability company. In today’s article, we’ll discuss the basics of each business structure along with its advantages and disadvantages so you can choose one that fits your circumstances.

1. Sole proprietorship

A sole proprietorship is the simplest business structure, with one person in charge of the company’s day-to-day operations. For entrepreneurs who wish to test their business idea before creating a more formal company, sole proprietorships are a good option.

Sole proprietorships don’t have their own legal entity, which means your business assets and obligations are undetached from your personal ones. For example, the profits of the sole proprietorship flow directly to its owner. And as you’re the only one who established the business, it’s obvious that the income will go into your pocket. 

The same rule will apply to your liability obligations which means you’re personally responsible for your company’s liabilities. This, on some occasions, could place your assets at risk, as they could be seized to satisfy a business debt.

There are several advantages when you structure your business as a sole proprietorship. Sole proprietorships are inexpensive to set up, and when running the business there are minimal fees (such as business taxes and operating license fees). Also, you may be eligible for tax deductions, such as health insurance. Another plus is that this type of business doesn’t require activities such as shareholder meetings, nor do you need to hold voting or election of directors.

On the downside, it’s often difficult to raise capital for sole proprietorships. This is because as a sole proprietor, you have no stock to sell, not to mention that banks and credit unions are hesitant to lend to sole proprietorships. As a result, you may heavily depend on your financing sources, such as savings, home equity, or family loans.

When it comes to filing taxes, the process is easy to follow. Because a sole proprietorship doesn’t exist as a separate legal entity from its owner, you’re not required to file separate income tax forms. In the US, all you have to do is fill in the personal income tax return, Form 1040, and attach it along with Schedule C, a report of profit or loss from a business. 

2. Partnership

A partnership is a form of a business structure owned and operated by several individuals. This is the simplest business structure with two or more owners. Partnerships are considered a suitable option for businesses with multiple owners or professional organizations (such as attorneys) looking to test their business idea before establishing a more formal company.

Partnerships come in two varieties: limited partnerships and limited liability partnerships. In limited partnerships, there’s only one general partner with unlimited liability and several other partners with limited liability. As a result, the general partner operates the business and assumes liability for the partnership, while the limited-liability partners have little control over the business and aren’t subject to the same liabilities as the general partner. This will be stated in a partnership agreement.

Limited liability partnerships are similar to limited partnerships, except that all partners who join to form the business have limited liability. Each partner in a limited liability partnership is protected from obligations owed to the partnership, and they aren’t liable for the activities of other partners.

The biggest advantage when forming your business as a partnership is the tax treatment your business enjoys. A partnership doesn’t pay tax on its income but passes through any profits or losses to the individual partner’s tax returns. When tax season in the US comes around, the partnership files a tax return Form 1065 that submits it to the IRS. Along with that, each partner fills in Schedule K-1 of Form 1065 to report their share of income and loss.

However, partnerships also have disadvantages, such as complicated paperwork when registering the company. Besides, if any disagreements occur between the partners, it would slow down the business’s operations. 

3. Corporation

Corporations are more complex than the other two business structures above. A corporation is an independent legal entity, separate from its owners. Therefore it often comes with more regulations and tax requirements.

In the US, there are two main types of corporations: C-corporations and S-corporations. A C-corporation is a legal entity independent from its owners, while an S-corporation can have up to 100 shareholders and operates somewhat similarly to a partnership.

The most significant advantage for a corporation is its liability protection to each shareholder. Because a corporation’s debt isn’t considered its owners’ debt, forming your company as a corporation won’t put your personal assets in danger. Another plus is the ability to raise capital. A corporation can sell stock to raise funds. 

One drawback of corporations is that they are subject to more requirements, such as meeting, voting, and the election of directors. Also, it’s more expensive to set up a corporation than a sole proprietorship or partnership.

When it comes to taxes, a corporation is subjected to pay both federal and state taxes. At the same time, earnings distributed to each shareholder in the form of dividends are taxed on their personal income tax returns. In other words, owners of a corporation may pay a double tax on their business’s earnings.

4. Limited liability company

A limited liability company is a hybrid business structure that brings together the characteristics of both partnerships and corporations. Limited liability companies have been around since the 70s, but they have only gained popularity recently. 

Unlike an S-corporation, which has a limit of 100 shareholders, a limited liability company has no such restriction. When registering a limited liability company, you must submit the articles of association with the Secretary of State in the state in which the company intends to do business. In some states, an operating agreement is an additional requirement.  

On the positive side, a limited liability company comes with fewer paperwork requirements when setting up the business than a corporation. The limited liability company provides personal liability protection to business owners, which means personal assets won’t be at risk if your company faces bankruptcy or lawsuits. 

On the downside, a limited liability company costs a fair amount to set up. Also, it may need to hire a technical accountant and an attorney to ensure that it complies with tax and regulatory requirements.

When filing taxes, the profits and losses of the business are passed on to the owners without facing corporate taxes. However, a limited liability company member is considered self-employed and must pay self-employment tax contributions towards Medicare and Social Security.

The bottom line

This article covers the basics of four business structures as well as their advantages and disadvantages. It gives you a good grasp to choose which business structure you’ll go for when you start your “venture” journey.

If you’re interested in entrepreneurship stories, business tips, or productivity tools, find more posts like this on Shoeboxed. Shoeboxed is a cloud-based software that helps businesses turn their massive paper receipts into digital data. With Shoeboxed, you can accomplish a variety of tasks: scan, store and organize receipts, manage business expenses, store business cards and even track mileage for business travelers. It’s simple to install and easy to use. Have a look at Shoeboxed now and see how it can transform the way your company does work.

How To File Taxes For The First Time: A Complete Guide To All Your Questions

The first time filing taxes is a significant milestone for any young adult or freelance worker. You could count on your parents to handle tax filing in the previous years, but now it’s your turn to be responsible for your finances and file your taxes. This article will give you some quick tips on how to file your taxes for the first time and answer the most common questions. 

When do you need to file your taxes?

First, let’s figure out if you need to file taxes this year. This depends on your age, income, and filing status. For example, if you’re under age 19 (or under age 24 and a full-time student) and your parents cover more than half of your financial expenses, they can likely claim you as a qualifying child, and you won’t need to file taxes in this case. Another example is if you’re not married, younger than 65, and your gross income is less than $12,400, you also don’t need to file tax. 

Otherwise, if your income is from self-employment, this would be considered a “special situation,” and you’d be required to file your tax return. You can take a look at this guide for the minimum income to file taxes. 

how to file taxes for the first time
The IRS’s guide for the minimum income to file taxes

You can always check the IRS Tax Guide and answer a few questions to determine if you need to file.  

Important notice: Before filing your taxes, don’t forget to check with your parents to determine if they’re claiming you as a dependent on their taxes this year. This can happen if you still live with them or they offer substantial financial support. If you have enough income, you’ll still need to file your tax return, but your parents will get certain tax benefits, such as education tax credits and the Credit for Other Dependents. In this case, when preparing your return, you’ll need to indicate that you can be claimed as a dependent on someone else’s return. 

What documents do you need to file taxes? 

1. Personal documentation and income tax forms

To prepare for your taxes, you’ll need to provide your Social Security number, your income (and any freelance work) or unemployment income, and receipts of other income types (from real estate, royalties, trusts). You’ll also need to prepare a copy of last year’s tax return. 

Here is a list of tax documents needed before you begin: 

  • W-2s 
  • 1099s
  • Receipts of other types of income (from real estate, royalties, trusts)
  • Tax forms that report other income types

FYI: Keeping track of all your receipts can be a daunting task — paper receipts can fill up your wallet, desk, and drawers. In this case, consider using a receipt management app to store these papers digitally. See our suggestion for the Top Five Receipt Scanner And Organizer Apps 2021 to choose which one works best for you. 

Keep in mind that the IRS wants to know about all of your income, including your side jobs, bonuses, and interest income (such as from your savings account or investments), which the bank will notify you with a 1099-INT form if you’ve earned more than $10 in interest. So, don’t forget to keep track of your activities in the past year that might impact your taxes, such as: 

  • Changing jobs
  • Opening a new savings account
  • Selling stocks or mutual funds
  • Paying college tuition or student loan interest

2. Deductions

Deductions are factors that can lower your tax bill and can add to your refund. For instance, if you’re a student, you may be eligible for educational deductions. Your school will notify you if you qualify for these deductions by sending you a Form 1098-T. You can also deduct the interest you paid on your student loan. Or, if you’re a freelancer working from home, you might get the home office deduction. 

The most common tax deductions and credits for first-time filers are the following: 

Make sure you’re claiming as many deductions as possible, but remember to keep your deductions honest. 

You can try summing up itemized deductions and see if they’ll turn out to be more than the standard deduction. If not, don’t itemize since the standard deduction will save you more money.

Besides, if you itemize deductions, you need to be able to prove your expenses. This means being organized and keeping track of your receipts so you can prove to the IRS your return is legitimate. 

You can also claim your stimulus check if you missed one (or both). Check out the Recovery Rebate Credit on 2020 to see if it’s possible to claim this and file in Form 1040 or Form 1040-SR when preparing your federal tax return.

How to file taxes? 

After gathering all the necessary information, it’s time to start filing your taxes. But how to file taxes for the first time correctly? There are three options that you can choose from.

1. Filing taxes online

One of the most convenient ways to do your taxes is to file online. If your tax situation is simple, you can file your taxes for free using online tax services like TurboTax, H&R Block or the IRS’s free e-file options. You can also pay for premium packages to get access to extra features. 

These tools are comparatively easy to use. They will guide you through the process by asking you simple questions and filling out your state and federal returns for you. You can even take pictures of your completed forms and upload them to have your information entered automatically. Once you’ve finished, the tool will calculate the possible refund and file your taxes for you. 

2. Filing with a tax professional

It’s a great idea to have a specialist do your taxes if your tax situation is a bit complicated. You’ll have to pay a fee, which varies depending on the complexity of your taxes and the professionalism of the tax preparer. You can hire a certified public accountant, attorney, or enrolled agent. Just make sure the person is qualified by checking their credentials. 

Typically, the price range is between $100 and $300. If you’re looking for a low-cost option, you can look into your local credit unions and see if they may offer low-cost tax preparation services.

3. Filing your taxes manually

If you choose to file your taxes manually, especially when it’s your first time, it can be a bit complicated. You’d have to fill in Form 1040 or Form 1040-SR by hand and calculate all your income and deductions. After that, you’d have to send the form via email and wait from six to eight weeks for the IRS to process your return.

Though this is no longer a common way, especially when you don’t know how to file taxes for the first time, it can still be helpful for those who like to do some “DIY accounting” or simply want to practice the process. Keep in mind that if you choose to print and mail your return to the IRS rather than e-file it, you’ll have to think about the correct postage or stand in line at the post office.

The bottom line

Filing taxes, especially for the first time, is never easy and can lead to endless headaches. However, don’t let it scare you. All you need to do is track and manage your expenses properly, keep all necessary documents, and use a reliable tax service or contact a tax professional. 

The Shoeboxed Receipt Scanning & Expense Tracking app enables users to keep track of their expenses and receipts by turning paper receipts into digital data for tax prep purposes, accounting and bookkeeping. You can clear your wallet, desks, and drawers of paper receipts and have them precisely scanned with our OCR engine and human data verification features. We ensure that all of your paper receipts are legibly scanned, clearly categorized, and accepted by the IRS. 

Shoeboxed saves you a lot of time and hustle preparing for taxes, especially for the first time. Shoeboxed is now available on iOS and Android. Get your free trial now and be ready for the tax season! 

Tax Filing 101: Choosing the Right Filing Method

While there is no “one size fits all” solution when it comes to tax filing, being equipped with an arsenal of facts may steer you in the right direction. Check out this helpful guide from our friends at Bench to get started.

This guest post is brought to you by Bench, the online accountants that use your Shoeboxed receipts to build you tax-ready financial statements.

Tax season is fast approaching and many small business owners are facing the same dilemma – what’s the best way to file taxes? While there is no “one size fits all” solution, being equipped with an arsenal of facts may steer you in the right direction.

Option One: DIY

This is ostensibly the cheap and dirty method, but what does filing on your own really cost?

Cost (Not Including Bookkeeping)

Assuming that you pay yourself a wage of $20.00/hour, the cost of filing business taxes on your own adds up very quickly. Based on IRS estimates of time spent filing tax returns, these are the prices you’re actually paying to file yourself:

Form 1040, Schedule C (sole proprietors):  $200.00 1
Form 1065 (partnerships): $640.00 2
Form 1120/1120S (corporations): $1,540 3

Accuracy

One of the most important aspects of filing taxes is accuracy – both to ensure that you get the maximum available refund and to avoid the steep penalties charged for filing errors. To put this into sharp perspective, it is estimated that Americans miss $1 billion in available deductions by attempting to file taxes unassisted – that’s $460.00 per person!4 In addition to that, in the event of an error with your tax return, you will be personally liable for any associated penalties and interest charged. Oh, and just because they can, the IRS accrues interest on outstanding payments and penalties daily.

Support

The IRS website? Google? Filing taxes unassisted is just that – unassisted. And if you happen to get audited, you will also have to represent yourself in front of the IRS or pay for professional representation.

Option Two: Invest in Software

As with almost everything else in life, filing taxes is moving into the online realm, with nearly 30% of Americans choosing this method.

Cost (Not Including Bookkeeping)

Like filing unassisted, the real cost to calculate when considering this option is the time you spend using the software, which will vary considerably depending on your familiarity with the program and the complexity of your tax return. The following prices are for TurboTax Federal & State filing, plus a conservative estimate of your time invested.

Form 1040, Schedule C (sole proprietors): $150.00 – $190.00
Form 1065 (partnerships): $300.00 – $500.00
Form 1120/1120S (corporations): $490.00 – $720.00

Accuracy

All tax filing software comes with a “maximum refund guarantee,” which entitles you to a refund on the price of the software if you can get a larger refund using another filing method. Just keep in mind that you would have to actually file your taxes by another method to claim this refund – and absorb the additional cost of doing so.  In the event that you are slapped with any filing penalties, you will be reimbursed only if the offending error was caused by a software miscalculation – not a user error.

Support

All software programs have built in support features like live chat and telephone assistance – though you will likely speak to a different person with every issue.

Option Three: Use a Retail Tax Service

If software just isn’t cutting it, but you’re not ready to invest the time and money to find a qualified CPA, you may consider a walk-in service.

Cost (Not Including Bookkeeping)

Retail tax preparers, like H&R Block and Liberty Tax Service, generally charge per form. While the best way to know for sure is to receive a quote, the following are the average prices you’re looking at:

Form 1040, Schedule C (sole proprietors): $200.00 – $250.00
Form 1065 (partnerships): $500.00 – $700.00
Form 1120/1120S (corporations): $750.00 – $850.00

Accuracy

Retail tax preparers are backed by a guarantee policy that covers you for both penalties and missed deductions; however, as with the software guarantee, you would have to catch the missed deduction in order to claim the refund. One other important thing to note about accuracy is that registered tax preparers are not required to have any education in taxation and do not have to pass any competency exams – though the IRS is attempting to change this.

Support

Your tax preparer will be able to answer questions throughout the process of filing your return, but year-round support is limited as the retail tax industry is extremely seasonal and the vast majority of employees are only employed from January – April. In the event of an audit, tax preparers are not licensed to represent you in front of the IRS.

Option Four: Call in the Pros

This option will cost you the most up-front, but it will also save you the most in the long run – much like paying for regular car maintenance to preserve the life of your vehicle.

Cost

Most CPAs and EAs charge by the hour, so the easiest way to reduce your tax bill is to ensure that your books are well maintained and that you have all the required documentation ahead of time. The following are the average price ranges for professional tax preparation, though price varies considerably by situation, location, and experience.

Form 1040, Schedule C (sole proprietors): $250.00 – $500.00
Form 1065 (partnerships): $500.00 – $1,000.00
Form 1120/1120S (corporations): $1,000 – $2,500.00

Accuracy

Both CPAs and EAs have significant education and experience in taxation. In addition, they’re required to undertake continuing education to stay up to date on changes to tax law. Not only will a CPA or EA get you the maximum available refund when your taxes are due, they will also work with you to create a customized business plan that minimizes your tax bill over time.

Support

Personalized year-round support is the greatest benefit of using a qualified CPA or EA. While other tax preparation options may be able to provide a comparable tax refund in April, only a CPA or EA can advise you on how to significantly reduce your tax bill over time through calculated tax planning and business structuring. Finally, in the event of an audit, both CPAs and EAs have unlimited ability to represent clients in front of the IRS.

Bottom Line?

There are a whole host of factors to consider when choosing a method to file taxes, so you really have to take the time to find the option that works best for you.

If there is one thing that holds true for any method, it’s that good bookkeeping and solid preparation are the easiest ways to reduce both time and expense in April (or March for corporate returns)!

To get a head start this year, learn “How to File Your Taxes in 5 Minutes per Day!


This post is brought to you by Bench. Bench is the modern bookkeeping service that provides audit-proof financial statements from online accountants at an affordable fixed price. Not in the software business or the accounting business, Bench is in the business of solving accounting problems and letting clients spend more time doing what they love.