Taking the leap to start a business is very exciting. The processes and governmental and administrative tasks necessary to start and run a business in the United States can be less exciting, and most likely very confusing. Gov Doc Filing is here to simplify the startup process. We have helped hundreds of businesses, big and small, take the right steps to successfully set up and run their business.
The first official step when considering the administrative tasks of starting a business, is selecting which entity type is right for the type of business you are starting. There are five main types: Sole Proprietorship, Partnership, Limited Liability Company (LLC), S-Corporation, C-Corporation. Once decided, the next step is to get a Tax Identification Number (TIN), also called an Employer Identification Number (EIN), from the IRS by submitting an application for the entity.
The type of entity you register is important because it determines how the company, and you, will be handled in the following circumstances:
- How the profits are taxed by the IRS
- How you will be treated in a lawsuit
- The type of bank account you can open
- The amount of account and additional tax form required
What is a Sole Proprietorship?
You can have a business as an individual, without going through the process of forming an LLC or Corporation. So, you are a Sole Proprietor. The biggest differences between a sole proprietor and an LLC or Corporation are the liability and taxation differences. Sole Proprietors are a simple entity where no additional formation is required by the state or IRS, other than an EIN/Tax ID.
IRS Definition of a Sole Proprietorship: A sole proprietor is one individual who ones a company that is not incorporated or registered with the state as an LLC. Properties of a Sole Proprietor:
- The business does not exist separately from the owner of the sole proprietor/individual
- The risks of the business apply to the individual person assets, including those not used for the business
- The sole proprietor reports business income on his or her personal, individual tax return
- A sole proprietor may or may not have employees
Taxation and Liability of a Sole Proprietor:
The type of taxation required of a sole proprietor is called “Pass Through Taxation”, meaning that all of the profits and losses from the business will pass through to the individual’s personal tax return. The profits and losses from running your business will go on form Schedule C of your personal tax return to the IRS.
When reporting profit and loss as a sole proprietor, you are required to pay a Self-Employment tax to the Federal government, of 15.3% tax on your earnings.
The individual is 100% liable for your business and your personal assets are at risk in a lawsuit.
Example of a Sole Proprietor:
You started making jewelry and selling it on Etsy.com. You are making income from selling the jewelry, and you have costs of making and selling the jewelry. You want to open a bank account for the business that is not your personal bank account. You will need to file for an EIN/Tax ID Number for the entity type of Sole Proprietor/Individual.
Additionally, if you hire someone to work in your home, such as a nanny or care taker, whom you pay for their services, you are considered a household employer, and should also obtain an EIN/Tax ID number to account for the payment made to the employee.
Tax ID for Sole Proprietor & DBA
The legal name associated with an EIN/Tax ID of a sole proprietor will be the name of the individual himself/herself. How you enter your name on the application for an EIN, will be the legal name of the EIN. You can choose to include your middle name or not.
Individuals are allowed only 1 Sole Proprietor EIN/Tax ID in their life time. If you applied for and received a tax id number from the IRS at some point, but no longer need that EIN, or would like to get a different sole proprietor EIN for a different purpose, than you will need to cancel the original EIN with the IRS. To do this, a hand written letter must be mailed to the IRS with your existing EIN, your social security number, and signed by the individual.
You can still have a sole proprietorship entity type, even if you choose to name the business something other than your personal name. This is called a “Doing Business As” (DBA), or “Fictitious Business Name”. You will need to file the appropriate forms to form a DBA with the county you are running your business in.
Quickly Obtain an EIN/Tax ID for your Sole Proprietorship.
If a Sole Proprietor sounds like the right option, then you will also want to get a Tax ID Number, so that you do not have to use your social security number in business matters.
Start Sole Proprietor/Individual Tax ID Application
With your Federal Tax ID number, you will be able to the following things:
- Apply for a bank account in the name of the company
- Acquire credit in the name of the company
- Separate personal identities from most business dealings
- Hire employees
- Engage in business with other types of organizations, including trusts, IRAs, estates, non-profits, farmers’ cooperatives, and plan administrators
What is a Partnership?
If you are starting a business with someone else, or a group of people, so that you are not the only individual responsible, then you can form a Partnership. The liability and taxation are passed on to the individual members of the partnership, and no additional federal filings or fees are required other than an EIN/Tax ID to identify the business.
IRS Definition of a Partnership: An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if the members take part in a trade, business, financial operation, or venture and divide its profits. Properties of a partnership:
- Partners can be individuals, corporations, trusts, estates, or other partnerships
- Each partner contributes money, property, labor or skill, and expects to share the profits and losses of the business
- Equity of the partnership does not need to be divided equally among partners to be a partnership.
- While not required, Partnerships should create a partnership agreement, which should include the following:
- How partners are going to divide expenses
- Where the profits will be allocated
- How often and how much the distributions will be for
- The responsibilities of each partner
- Disagreement resolution plan
- How a partner can exit in the future if desired
Taxation and Liability of a Partnership:
The type of federal taxation of a partnership is called “Pass through Taxation”, meaning that all of the profits and losses from the business will pass through to the partners’ individual tax returns. The profits and losses from running your business will go on Form 1065 of your personal tax return to the IRS. Income and Deductions will go on form Schedule K of your personal tax return to the IRS.
The percent of ownership decided on between partners will be the same percentage of income that is passed through to the individual’s form 1040 (individual income tax form).
Partners in a Partnership are required to pay a Self-Employment tax to the Federal government, of 15.3% tax on your earnings.
The individuals of a partnership have unlimited liability of the partnership. This means that you are personally responsible for any debts that any of the partners may have taken on in the business, as each partner is an agent of the partnership.
In a lawsuit, your personal assets, as well as the personal assets of all of the partners, could be at risk.
Quickly Obtain your EIN/Tax ID Number for your Partnership
Partnerships are required to have an Tax Identification Number, for federal tax purposes. The process of obtaining an EIN can be complicated with the IRS, but with Gov Doc Filing, it is very simple!
Start Partnership Tax ID Application