Starting a Business in El Paso? Tax Matters Offers Entity Formation Services for New Business Owners
What is Entity Formation?
When starting a new business, you must decide what form of business entity you wish to establish. The form of business entity will determine how you file your income tax return, which must be filed annually with the Internal Revenue Service (IRS). The most common types of business entities are sole proprietorships, partnerships, corporations, and S corporations.
How to Form a Business Entity
Forming a business entity involves a large amount of work. The majority of the beginning stage is researching federal and state regulations and completing paperwork. Using our expertise in tax regulations, we can help you cut back on time by guiding you in the right direction.
Here is a glimpse of the formation process:
- Filing Formation Paperwork: You’ll first need to file a form with the state agency and pay filing fees. Once the paperwork is complete, you’ll receive a certificate confirming the company’s status.
- Setting Up Financial and Tax Accounts: A couple of the accounts you’ll need to create are a federal Employer Identification Number (EIN), a business bank account, and register licenses with state and local taxing agencies.
- Business Insurance: Protecting yourself is key. In the event that your business is sued, you can be protected against personal lawsuits. You will also need insurance to safeguard your building against fires, theft, natural disasters, and data breaches.
- Utilizing Contracts to Protect Yourself: Contracts can protect the business from misunderstandings and disagreements. You’ll want to decide on a Non-Disclosure Agreement (NDA), employee contracts, intellectual property, and other terms and conditions of the work environment.
- Keeping Up With State Agencies: Each year, your business will need to make sure it’s following state laws. This means filing an annual report, paying license fees, and adjusting practices if state regulations have changed.
Deciding Which Type of Business You Will Be
Of the many decisions you will need to make when starting a business, the type of legal structure you select is perhaps the most important. Your business entity will determine how much you pay in taxes along with the amount of paperwork that will need to be filled out annually. Considering the pros and cons of each entity will help you make an informed decision. The three main factors to consider are: liability, taxation, and record-keeping.
- Sole Proprietorships: This is the most common type of entity. The owner will own an unincorporated business by him or herself and allows for complete managerial control. Exceptions to sole proprietorships are if a sole member of a domestic limited liability company (LLC).
- Partnerships: Two or more individuals who join forces to run their trade or business can be considered a partnership. Each member contributes labor or skill, property, money, and is expected to share the profits and losses of the business.
- C Corporations: As a C corporation, shareholders will own the company and elect a board of directors who make decisions and enforce policies. The benefit of this type of corporation is that you at a lower risk of being audited by the IRS. Moreover, you can write off costs of the business such as healthcare plans. Requirements of a C corporation are having adequate investments, a formal issue of stocks, holding regular meetings with shareholders and director, and keeping an updated record of all transactions separate from the corporation’s owners.
- S Corporations: To be considered an S corporation you must meet certain criteria. You must be a domestic corporation, have shareholders who are not partnerships, corporations or non-resident shareholders, cannot have more than 100 shareholders, only have one class of stock, and not be an eligible corporation such as a financial institution, insurance company, or a domestic international sales corporation.
- Limited Liability Company (LLC): As an LLC, the state regulates your eligibility. Owners of an LLC are considered members and while there is no maximum number of members, most states do not allow a single member. In Texas, requirements for an LLC include: obtaining local and state business licenses, filing a Certificate of Formation (Form 205) with the Secretary of State, and making sure the name of your business is distinguishable from existing LLCs in Texas.
How to File Taxes if You Are This Type of Business:
- Sole Proprietorship: A sole proprietorship must report the business’s income and losses on personal income tax. The IRS refers to this as “pass-through” taxation. On Form 1040, Schedule C is where you will list all taxable profits and expenses, no matter how much revenue you withdrew from the business.
- Partnerships: As a partnership, you must file an annual report that includes income, deductions, gains, losses and so forth. The business does not pay income tax but instead is considered a “pass-through” by IRS terms. While the business itself doesn’t file income taxes, each partner must include his or her portion of the business’s profits and losses on his or her tax return.
- C Corporations: The IRS recognizes C corporations as a separate taxpaying entity. All profits earned by the corporation is taxed and is also taxed to shareholders when distributed as one share of the profit. The corporation would not get a tax deduction if they distribute these dividends to shareholders.
- S Corporations: As an S corporation, you can avoid the double taxation of a C corporation because you elect to pass corporate income, losses, deductions, and credits from shareholders. However, you must file profits and losses on personal tax returns.
- Limited Liability Company (LLC): Similar to a partnership or sole proprietorship, the LLC’s members will report annual profits and losses on their personal income taxes. The LLC itself does not pay federal income taxes.
Don’t be Overwhelmed — Tax Matters Offers Professional Guidance in Entity Formation Services
The initial stages of forming a business consist of the most important decisions you will make. Long-time business owners have advised seeking professional assistance early on to avoid mistakes. Among the decisions you will make, your business entity formation will determine how you file taxes and can prevent personal liability as well as the amount of money you can raise.
At Tax Matters, we understand the importance of this single decision, which is why our entity formation services will help you make a decision that will benefit you for years to come. We provide guidance based on IRS regulations as well as state requirements while helping you understand what you expect when it comes to filing your business taxes. Our goal is to make your business dreams a reality.
Contact Us Today to Learn More
If you’re thinking of starting a new business in El Paso but aren’t sure where to start, give us a call today. Tax Matters offers entity formation services year-round. We can help you take the right step toward opening a prosperous business.