Setting up a company
Your Business Structure
The first step in legally setting up your company is to decide on what
form of business you’re going to set up:
Sole proprietorship
This is the simplest business form. As an unincorporated model, the business
is a part of your personal property and does not exist outside of you. So
its liabilities are your personal liabilities. The risk of the business is
a risk to you.
Partnership
A partnership is similar in personal risk and asset attachment, but it
is owned by two or more people. Each person in the business relationship
contributes money, property, labor or expertise and receives a portion of
the profits (or losses) of the business.
The partners are not employees and the business does not need to pay taxes
on its own. Profits or losses are transferred directly to partners’ income
tax returns.
Corporation
A corporation has an identity of its own. While forming a corporation,
a person or people exchange money, property, or both for a certain percentage,
called shares, of the corporation’s capital stock. The shareholders
then receive a portion of the company’s earnings according to the number
of shares in the company.
Since the corporation is an entity on its own, the shareholder
or shareholders are limited in their liability.
S corporation
S corporations are similar to normal corporations, except when it comes
to methods of taxation. In a corporation, profits are taxes twice, once when
reported as company profit, once when reported as shareholder income. S corporations
avoid this double taxation.
LLC
A Limited Liability Company (LLC) offer owners limited personal liability
for the debt and actions of their company. But in other ways, an LLC functions
as a partnership, allowing flexible management and similar taxation.
LLC owners are called members, and members may include individuals, corporations,
or even other LLCs. Because LLCs are allowed under state laws, specific rules
and operations may differ from state to state.
Tax ID Number
All businesses must file tax forms. And to file taxes, you must obtain
a tax ID number, or an Employer Identification Number (EIN). Similar to the
Social Security numbers given to individuals, an EIN is a unique number assigned
to a business to avoid any confusion using a business name might cause.
You must also check with your state to find out what filings businesses
are required to file there.
Accounting Methods
Your business must use a consistent method of accounting. Most businesses
use either the cash method or the accrual method.
Cash method
The cash method of accounting is based on the flow of money.
In this, a business only reports the income actually
received and expenses actually paid.
Accrual method
The accrual method is based on the flow of goods or service.
For example, if your company performs a service valued at
$500, it would pay tax on the $500 in the current tax year, even
if the payment for these services wasn’t received until the following year. Likewise,
when the company incurs an expense, this is treated as a deduction in the
current tax year, even if payment of the expense doesn’t occur until
the following year.
This is a wide overview of accounting methods. Ask your accountant for
more precise descriptions. The important thing to know is that you must choose
a method when you start your business.
You must also choose an accounting period – the tax year. This is
the time period on which your taxes are based. A calendar year is a common
tax period, starting January 1st and ending December 31st. But other time
periods are used. |
