Regardless of the entity structure, there are advantages and disadvantages to
selecting a sole proprietorship, a partnership or a corporation for a new
business. b Several considerations (including tax reporting) must be
considered. b A sole proprietorship is the easiest and most cost-effective to set
up (Ancheta, 2023). b This type of entity accounts for payments to owners who
work at the business by taking draws or drawing money out of the company. b
Income and expenses are reported on the personal tax return via a schedule C.
There are several different types of partnerships, but speaking in general terms
a partnership is easy to set up and is usually inexpensive to get started. b A
partnership has an operating agreement between the partners. b It can elect to
be taxed as a partnership or as a corporation. b A lot of the partnerships that I
work with have submitted the IRS form 2553 to elect to be taxed as an s-
corporation. b b Partners in a regular partnership typically receive guaranteed
payments for services or use of capital. b However, if they have done the s-
election they get paid payroll if they are working for the business. b b A
partnership would file a 1065 tax return and income and expenses would pass
through to the partners on their personal return via a K-1. b If the 2553 was
filed, they would complete an 1120-S tax return. b Income and expenses would
pass through to the personal tax return via a K-1.
Again, there are several types of corporations. b Generally speaking, a
corporation is usually harder to set up. b They can be subject to double taxation.
“C Corporations pay corporate taxes on earnings before distributing their
profits to the shareholders in the form of dividends. Individual shareholders
are then subject to personal income taxes on the dividends they receive”
(Ancheta, 2023). b The income tax would be calculated and due on the 1120 tax
return. b No income and expenses are passed through to the owner. b b If an s-
corporation was set up by filing the IRS form 2553, owners working at the
business would be paid payroll. b Income and expenses are passed through to
the owners via a K-1 and allocated by ownership interests. b An S-Corporation
is required to have fewer than 100 shareholders. b Distributions are also
sometimes given if warranted. b
When working in the accounting field, it is sometimes necessary to assist a
new business owner with identifying the most appropriate entity structure for
tax purposes. b “A sole proprietorship is an unincorporated business with one
owner” (Rittenberg, 2023). b An example of a good fit for a sole proprietorship
would be a single owner starting out a very small photography business in
their spare time. b Income and expenses for the business would be reported on a
Schedule C with the personal tax return. b “As a sole proprietor, you are
personally responsible for all your business debts and obligations, including
loans, leases, credit accounts and lawsuits.” (Rittenberg, 2023). The nice
thing about a sole proprietorship is that it can always be converted to another
type of entity in the future should liability protection, for example, be a
concern.
References:
Ancheta, A. (2023, January 23). What is a C corp? Investopedia. Retrieved
February 2, 2023, from https://www.investopedia.com/terms/c/c-
corporation.asp
Rittenberg, J. (2023, January 24). What is a sole proprietorship? Forbes.
Retrieved February 2, 2023, from
https://www.forbes.com/advisor/business/what-is-a-sole-
proprietorship/#:~:text=A%20sole%20proprietorship%20is%20an%20uninco
rporated%20business%20with,sole%20proprietorship%E2%80%93you%E2
%80%99ll%20automatically%20be%20a%20general%20partnership%20inst
ead.
