While you don’t have to do much to start a business if you have a sole proprietorship, there are other business structures and legal entities for your online business that you can choose from that you need to know about before you choose a permanent structure.
Sole Proprietorship (SP)
This is the leading business structure that people choose, especially service providers and those without the worry of a lot of liability. For example, if you work as a VA performing secretarial tasks, go through those tasks to find out if there is anything risky for you to be involved with.
For example, if you ever handle your client’s credit card information or their customers' information, you may be exposing yourself to liability. Due to the structure of an SP, it offers no protection to your personal assets.
Income is reported on Schedule C on your 1040 tax form in the USA, and you also are responsible for paying quarterly taxes. Remember that taxes in the USA are “pay as you go” - that means when you earn the money, you owe the taxes. For this reason, paying your quarterly taxes will help you avoid problems.
General Partnership (GP)
You may be surprised to note that a GP doesn’t offer any of the partners protection over their personal assets. The steps to setting up a GP aren’t much different from setting up your sole proprietorship, except that you will need a general partnership agreement. You will, in some states, file that with your Secretary of State’s office. However, in many states, an agreement is not even required. Most people form an LLC with a GP to try to protect some assets.
It is recommended that you have an agreement though, as it can protect you at least from your other partners and define the terms of the work being done and other rules. It’s a useful guiding document to have - even when not required.
The way taxes work with a GP is that the partners will split all the expenses and income equally. The partners report the income on their 1040 forms on schedule C when filing taxes. However, even though a GP is not taxed as a separate entity like a C-Corp is - as they cannot retain income as it must be equally distributed to the partners - they do still have to file a Form 1065, which is a US Return of Partnership Income filed by each partner.
Limited Partnership (LP)
A limited partnership is just like a GP except that, as the title implies, it does offer some limited protection from your personal assets being accessed as only the amount of your investment is affected.
Limited Liability Company (LLC)
This is the second most chosen business structure that online businesses choose because it’s easy to set up, inexpensive to set up, and you can choose how to file when you file your taxes. With an LLC, the main benefit is that it protects your personal assets from the company’s debts or liabilities.
Any business can form an LLC, except for banks and insurance companies. LLCs, like the LP and the GP designation, do not retain earnings. All earnings are passed to the owners and members.
“S” Corporation (S-Corp)
This type of structure allows the owners to avoid double taxation by passing through the business income to the owners, who add the income and expenses to their tax forms. The S-Corp structure also offers personal liability protection against business losses.
“C” Corporation (C-Corp)
A C-Corp is just like an S-Corp, except that retained earnings will be taxed at the corporate rate.
Forming any of these entities can be done online on a site like Legal Zoom; however, it’s always better to get the help of a professional. While it’s good to be informed about these different business entities, it’s still best to talk to a legal professional. You can go with either a tax lawyer or a CPA that is also familiar with your type of business, specifically online businesses, so that you can set up your business with the right structure that provides you with the most protection and legality.
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