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Sundin & Company, PLC

Paul B Sundin, CPA
3180 S. Gilbert Rd, Suite #1
Chandler, AZ 85286

Phone: 480-361-9400

Fax: 480-393-5609

Starting a Business: What is the Best Structure?

So you’ve got a great business idea. You have finished your business plan, finalized your marketing initiatives, and determined your product pricing. But what about your business structure? This is often one of the most overlooked items when forming a business.

The simplest form of ownership (for an individual business owner) is the sole proprietorship. The business is actually just an extension of the owner. This form of ownership does not require a separate tax return. The owner will remain liable for the liabilities of the business.

Corporations are a form of ownership that provides some liability protection to the owner (or shareholder). The net profit of a corporation is taxed at the corporate level and then it is taxable to the shareholders upon distribution as dividends. Shareholders are not able to deduct any losses of the corporation. A corporation files a separate tax return (Form 1120).

Corporations can make an election to be taxed as an S-Corporation. This allows the shareholders to avoid the double taxation under a traditional C-Corporation, while still maintaining the limited liability protection. The S-Corporation's shareholders must include their share of the corporation's profit and losses on their tax returns. An S-Corporation files a separate tax return (Form 1120S).

Partnerships allow two or more individuals to go into business together. Partnerships are not taxable entities and the tax attributes merely flow through to the individual partners. The partnership files Form 1065 and distributes a K1 to each partner. The items on the K1 are then reflected on the partner’s individual tax return.

One form of ownership that is popular in many states is the limited liability company (LLC). Some states have certain restrictions and impose certain taxes on LLCs, which restricts their usage. However, LLCs generally are more lenient in their filing requirements than corporations. The business owner needs to determine if there are any restrictions on LLCs in the state that he or she operates in.

When starting a business, you have many things to consider. One of the most important decisions will be your legal and tax structure. Please utilize a competent CPA and attorney in your decision. Any money you spend will be well worth it. If the entity structure is not determined correctly up front, the costs you would incur to correct the structure will far exceed any initial costs you would have spent.

Paul B. Sundin has been a CPA since 1997 and he specializes in business and real estate taxation. Please contact Paul at 480-361-9400 or you can email him at paul@sundincpa.com.