you’ve been thinking about starting a business in
Washington State? You’ve
got the concept and the name, and you have a good idea of your marketing
tools. You’ve done all the
legwork to find out if the idea will fly, and you’re confident of your
ability to accomplish it. You’ve written a business plan, and interested
Now you have to decide what form your business will take.
you are going into business alone, your choices include operating as a
sole proprietor, incorporating as a regular corporation, or
incorporating as a limited liability company
(LLC). If you are going into
business with associates, you may choose to operate as a partnership, a
corporation, or an LLC. If you are concerned with limiting your personal
liability, your choice is between a regular corporation and an LLC.
an individual who wants a small and simple operation, a sole
proprietorship is the easiest
and least regulated type of business.
Other than registering your business name and obtaining the
necessary licenses, a sole proprietorship can be set up anywhere. It is
an unincorporated business owned by one individual.
a sole proprietor, you report business profit or loss on your personal
tax return on a Schedule C. Top
partnership is the
relationship existing between two or more persons who join to carry on a
trade or business. A general
partnership can be formed by simply making an oral agreement between two
or more persons, but it’s better to have an attorney draw up an
agreement, clearly stating the duties and rights of each of the
partners. Each partner has
equal rights as laid out by the terms of agreement.
And they have equal shares in the liabilities as well.
Personal assets can be attached and liquidated if the partnership
cannot satisfy creditors’ claims. Our firm does not recommend
the partnership form of business since each partner is individually
liable for the other partner’s actions. For
example, if one partner commits fraud against a client, the other
partner becomes personally liable for all of the damages.
partnership is not a separate
legal entity for legal liability purposes,
but it reports its income on an informational tax return (Form 1065)
which passes through any profits (or losses) to each partner’s
individual tax return. If
you are a partner, you report your share of partnership profit
& loss on a Schedule K-1. Top
you decide to incorporate,
you should hire an attorney to set it up, and make sure it complies with
the corporate laws. Think of
a corporation as a legal
entity completely separate from you. It can continue to function even
without the existence of the original owners.
Many people choose this form because it limits personal liability for
the debts and other liabilities of the business, unless one of the
owners is required to give a personal guarantee for a loan or is found
to cause harm due to gross negligence. However, you need to know
how to Act Like A Corporation.
profit of a "C" corporation is
taxed to the corporation when earned, and then is taxed to the
shareholders when distributed as dividends. However, shareholders cannot
deduct any operating losses of the corporation.
"S" Corporation is generally exempt from federal income tax
other than tax on certain capital gains and passive income.
Its shareholders include on their tax returns their share of the
corporation’s separately stated items of income, deduction, loss, and
credit, and avoid double taxation (once to the corporation and again to
the shareholders). You may elect Subchapter "S" status
for your small business corporation (the election must be filed with the
IRS on Form
2553 within 75 days of
the start of the corporation or each calendar year) if it meets the
has no more than 35
the corporation has
only one class of stock;
all of the shareholders are U.S. residents, either
citizens or resident aliens;
all of the shareholders are individuals (i.e., no
corporations or other entities own the stock) and
the corporation operates
on a calendar year
of the members of a Limited Liability Corporation (LLC) are personally
liable for its debts. An LLC
may be classified for federal income tax purposes as either a
partnership, a corporation, or a sole proprietorship. A
separate election is made in choosing the form of the LLC.
incorporate your business or register your partnership in the State of
Washington, you must file with the Secretary
of State. This license is separate from the license with the
Department of Revenue.
is a table showing the advantages and disadvantages of each form of
business to help you make an informed decision. Top
issue of the type of entity for your business can be very complicated.
Be sure that you consult with an attorney or an accountant to
choose the best form for you. On
the next page is a table showing the various tax entities, and hopefully
helps make your decision a little easier.