What does it even mean to start a business? How do I do it right? Should I be a sole proprietor, an LLC, a corporation? We’re going to talk about 4 types of entities:
- Sole proprietorships and General partnerships (the part you’re reading now)
- Limited Liability Companies (or LLCs)
State primarily covers limiting your liability. And the federal (specifically the IRS) primarily covers taxes. And common sense covers your assets among other things.
For the first part of this blog, we are going to talk about Sole proprietorships and General Partnerships.
Sole proprietorships and General Partnerships
Starting with Sole proprietorships and General Partnerships, if you start acting like a business, you are a business. It doesn’t matter if you filed anything with the state or talked with the IRS, you have formed an entity. That entity is a ‘sole proprietorship’ if you are by yourself, and a ‘partnership’ if you are with others. This is everything from the little girl who is selling lemonade on the corner to an independent contractor hired to do freelance work. You are personally liable for all actions taken by your business. That means your house, your car, and even your precious beanie baby collection are all at risk. How do you avoid that? By registering the entity with the State of Indiana. You can have Partnerships registered to gain limited liability, such as with Limited Partnerships or Limited Liability Partnerships but these are not appropriate for all businesses. Also for many new businesses, an LLC may be a better way to go (check out the next blog).
Your tax status as a sole proprietor is as a disregarded entity, so you basically put all of your tax information on the Schedule C of your 1040 form, and the entity itself is completely disregarded. In a general partnership, it is what is known as pass-through taxation. Pass-through means that it is just taxed once. Your Partnership will file an informational 1065 tax form, and the partnership prepares a Schedule K-1 to give to each partner so they may report their income (or loss), deductions and credits individually. As such, the partnership does not pay tax itself.
There are two primary entity types that I work with: LLCs and Corporations. Yes, there are other entity types too, but they’re not very common. Stay tuned for the next blog on Part 2: LLCs! And Part 3: Corporations!