Business begins with an idea. Once that business begins to spend and, more important, earn money,it becomes an entity that is of interest to local, state, and federal authorities. Regulators will want to regulate, inspectors will want to inspect, and tax agencies will absolutely insist on collecting taxes.
Many of the ones we write about in this article can begin on the most casual
basis, as a sole proprietorship or a general partnership. In these sorts of businesses, the owners put their own money into the operation and pay taxes on their
We can also hope that your little idea for a business will one day grow into a
larger enterprise with multiple employees, assets of its own, and a long and
profitable life. Lets start by examining the most common structures for
A Form of Business
If you hang up a shingle that says “Paul Revere, Silversmith” (and your name is
Paul Revere), you can set up a sole proprietorship and run your business out of
your personal checkbook. In some states and localities, you must register the
business name with the county where you will conduct business. In addition,
banking laws generally require a business certificate to enable you to deposit
checks made out to “Paul Revere, Silversmith” into an account, although checks
to “Paul Revere” would probably be accepted.
If your birth certificate actually reads “Paul Hickenlooper” (to pick a name at
random), and you want to call your company “Paul Revere, Silversmith,” you
will need to file a business name search or file a fictitious name form in most jurisdictions.
There are advantages to each of the various forms of business, including sole proprietorships, partnerships, and corporations, that might argue for one or
another, depending on the nature of your enterprise.
State and federal laws differ with regard to certain requirements for various
business structures: for example, whether a business needs to have workers’
compensation insurance, the deductibility of certain expenses, and the filing of
tax and information returns.
Be sure to discuss available forms of business with an accountant and attorney.
Here is a general description of common options; please don’t confuse this
section with legal or tax accounting advice.
This is a business that is owned and controlled by an individual, with all of the
profits directed to the owner. In many localities the company must obtain a business license from local government; additional licenses and permits may be
required for certain types of businesses.
This is the simplest and least expensive form of business to set up, and the
owner does not have to answer to anyone else about operations.
The most significant disadvantage of a sole proprietorship is that the company and its owner are linked when it comes to financial responsibility, liability,
and taxes. If the business is unable to pay its bills, creditors can seek to collect
from the owner’s personal assets. When it comes to taxes, income from the business is treated as personal income of the owner.
It may also be more difficult to obtain bank loans and other types of financing for a sole proprietorship because of the limited resources of the single owner
and because the business’s success is entirely dependent on one person.
This is a business that is owned and controlled by two or more people, sharing
in the investment, management, and profits of the company. There should be a
written agreement signed by the partners, spelling out investment obligations,
management expectations, and the distribution of profits.
A general partnership has the advantage of additional sources of capital and
labor, but it does not relieve the partners of personal responsibility for debts and
other liabilities. Since the general partnership is not a separate business entity,
salaries, profits, and losses are reported as personal income by each partner.
This form of business is owned and controlled by two or more people, who share
in the investment and profits of the company, but who give operational control of
the business to a general partner or partners.
A limited partnership is a step toward a corporation. Though the partnership
is not a business entity of its own, the agreement among the owners can limit
responsibility for debts and liabilities to the general partner. The limited partners,
who do not exercise control over operations, are personally liable only up to the
amount of their investment in the company.
Setting up a limited partnership is more complex than forming a general partnership and should involve a lawyer to draft the agreements.
After receiving a charter from the state where it is headquartered, a corporation
becomes a legal entity that exists independently of the people who invest in it,
manage it, and share in its profits. The corporation, owned by its shareholders,
can raise funds through the sale of additional stock; depending on the type of
stock sold, shareholders may receive partial, majority, or total control over
Although it is possible to set up a corporation without the involvement of an
attorney using do-it-yourself kits and Internet sites, you may benefit from the
advice of an attorney, and you’ll want to coordinate your efforts with your
accountant, in any case.
The principal advantage of a corporation is that its owners (the shareholders) are personally liable only up to the amount they have invested in the corporation.
When it comes to taxes, the corporation reports its own income, expenses,
and profits to state and federal authorities and pays its own taxes and fees.
Dividends paid to shareholders are generally not deductible from business
income, and therefore this income is subject to taxes at both the corporate and
corporation passes through the income or loss to the shareholders, as a partnership would (the corporation does not pay taxes on the profit) and
provides the liability protection of a corporation.
As an employee of a corporation, you will report salary as personal income
on your personal tax forms.
Limited Liability Corporation
As a legal entity that is permitted in most states example in the USA, an LLC combines some of the
tax benefits of a partnership with the limits on liability of a corporation. A
lawyer’s advice is generally needed for the drafting of agreements among the
On the tax front, shareholders report their portion of the company’s profit or
loss on their personal tax forms.
Check with city ,county .town clerks or your attorney to see if you require a local or
state business license. Some states require licenses for almost every form of business, while others are more selective.
Among businesses that often require licenses are trades, such as electricians, plumbers, construction, mining, forestry,and professions, including health care, financial services, entertainment, and food preparation and sale.
In some states, businesses operated from a home do not require a license, or
they may face less stringent criteria.
Sales Tax on Services and Products
Most states or countries tax services or products while other states exempt food and certain services and products from tax.
Contact your state department of revenue for details about requirements for your business; your accountant should also be able to advise you.
If you are required to assess sales tax, you will have to register with the state
and set up an account for regular deposit of taxes you have collected. In many
states or countries , you can obtain an exemption from having to pay or collect sales taxes if
you are buying products or raw materials and then reselling them to a retailer.
Again, your accountant should be able to help you set up your tax status.
In many parts of the world , zoning laws and regulations place limits on the
types of businesses that can be established and operated in particular areas. You
may be completely barred from opening a business in a residential area or other
noncommercial zone, or you may face regulations requiring off-street parking,
limits on hours of operation, or other strictures.