40.1 Forms of Doing Business

The legal form of your business determines the way you report business income and loss, the taxes you pay, the ability of the business to accumulate capital, and the extent of your personal liability. It is beyond the scope of this book to discuss the pros and cons of each form. The decision should be made with the services of a professional experienced in both the legal and tax consequences of doing business in a particular form as it applies to your current and future business prospects.

If you are going into business alone, your choices are: operating as a sole proprietor, incorporating, and forming a limited liability company (LLC). If you are going to operate 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 corporation or an LLC. An LLC gives you the advantage of limited liability without having to incorporate.

As a sole proprietor, you report business profit or loss on your personal tax return, as explained in this chapter. If you are a partner, you report your share of partnership profit and loss as explained in Chapter 11. If you incorporate, the corporation pays tax on business income. You are taxable on salaries and dividends paid to you by the corporation. You may avoid this double corporate tax by making an S corporation election, which allows you to report corporate income and loss (11.14).

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