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Which Entity Should I Form When Starting a New Business?

As a tax law attorney, friends and acquaintances ask me this question all the time: what type of entity should I form when starting a new business? With many business options available it can be confusing determining which business structure would be appropriate. Below is a general overview of each business structure and the tax responsibilities of each.

Sole Proprietorship

A sole proprietorship is a person who operates a business but has not registered the business with the applicable state’s Secretary of State. In other words, it is not a legal entity. A sole proprietorship is also owned by one person who bears all the liability of the business. This means the owner is personally responsible for all the business’s debt.

All income and expenses of a sole proprietorship are reported directly on Schedule C of the owner’s personal tax return. The owner will pay both the employer and employee’s portion of self-employment (FICA) taxes associated with the net income from the business on his/her personal tax return.

Partnership

A partnership is a relationship between two or more people to operate a business. Generally, each partner contributes money, skills, property, or labor and then shares in the profit and losses of the business. While it is good business practice for a partnership to have a formal written partnership agreement, it is not required. In addition, each state has its own rules on whether a partnership must register with the state’s Secretary of State.

Partners are able to bind the partnership to a contract as long as the act is within the scope of the partnership’s business. Partners may also be liable for the partnership’s debt depending on the type of partnership.

There are three types of partnerships to choose from: general, limited, and limited liability.

  1. A general partnership means all the partners participate in the day-to-day business operations. General partners have personal liability for the business’s debt.
  2. Limited partnerships have a combination of general partners and limited partners. The limited partners do not participate in the day-to-day business operations and do not have personal liability for the business’s debts. The general partners participate in the day-to-day business operations and have personal liability for the business’s debt.
  3. Limited liability partnerships provide liability protection for all partners, whether general or limited partners. Generally, limited liability partnerships are formed by accountants and lawyers.

Partnerships must file a tax return with the IRS each year. The partnership’s tax return will report all the business’s income, deductions, gains, and losses for the year. The partnership does not pay taxes on the partnership’s income, but instead it is “passed through” to the partners. The partnership return will issue a Schedule K-1 to each partner reporting each partner’s share on income and losses. Each partner will then report the respective income and losses on his/her personal tax return.

Limited Liability Company

By far, the most popular business to form is the limited liability company or LLC. A limited liability company is determined by the individual states. Each state has different regulations – see one recent change to Ohio’s LLC regulations, here. However, in general, LLCs can have one or more owners. The owners are called members and there is no maximum number of individuals who can be members.

Limited liability members enjoy the benefits of limited liability, which means the members have no personal liability for the business’s debts. An LLC does not have many regulations, and members have flexibility in how the business is structured and run. Like partnerships, LLCs should have a formal Operating Agreement and some states require such an agreement.

The IRS does not recognize an LLC for federal income tax purposes. Therefore, how an LLC is taxed each year depends on several factors. The first factor is whether the LLC is a single-member LLC or a multi-member LLC.

A single-member LLC is considered a disregarded entity with the IRS. This means that, similar to a sole proprietor, the single member will report the LLC’s income and expenses directly on Schedule C of his/her personal tax ret

A multi-member LLC may be taxed one of two ways. If no additional filings are made with the IRS, a multi-member LLC is considered a partnership with the IRS and will be taxed as a partnership. The LLC may also choose to elect to be taxed as an S-corporation. In order to be taxed as an S-corporation, the LLC must file Form 8832 with the IRS and affirmatively elect to be treated as a corporation. Under either a partnership or S-corporation taxation, the LLC’s income and expenses are passed through to each member. Each member will be issued a Schedule K-1 and must then report his/her share of the LLC’s income and expenses on his/her personal tax return.

Corporation

A corporation is a business structure that is separate and apart from its owners. Because a corporation is a separate entity, the owners are generally shielded from the corporation’s liabilities. A corporation consists of shareholders, a board of directors, and officers. Individuals purchase stock in the company, becoming a shareholder. The shareholder then legally owns the assets of the business. Shareholders do not generally run the business on a day-to-day basis. Shareholders elect a board of directors who appoint officers. The officers are tasked with running the day-to-day operations of the corporation.

Corporations have certain formalities that must be followed. Some of these formalities are annual meetings, maintaining corporate minutes, maintaining all written agreements for all transactions, maintaining separate bank accounts, and following the corporation’s bylaws.

A corporation must file a tax return each year with the IRS. A corporation is recognized as a separate taxpaying entity and is taxed on the corporation’s profits. As a separate taxpaying entity, double taxation may occur. Currently, corporations are taxed at a flat rate of 21%, however, this is subject to change. When a corporation distributes dividends to shareholders, the shareholder must report and pay tax on the dividends on his/her individual tax return. No tax deduction occurs for the corporation when dividends are distributed.

S-Corporation

S-corporation, or S-corp, is not an entity that is formed with a state’s Secretary of State. Instead, an S-corp is a tax designation. In order to be taxed as a S-corp, the company must file an election with the IRS affirmatively elected such tax treatment. In addition, an S-corporation has certain requirements that must be met to qualify as an S-corp. These requirements are:

  • Be a domestic corporation
  • Have only individuals, certain trusts and estates, and single-member limited liability companies as shareholders
    • Partnerships, multi-member limited liability companies, corporations and non-resident aliens are not permitted to be shareholders.
  • Have no more than 100 shareholders
  • Have only 1 class of stock
  • Not be an ineligible corporation (certain financial institutions, insurance companies, and domestic international sales corporations)

S-corps are also required to follow the same corporate formalities of a C-corporation while also paying a reasonable wage to any shareholder that participates in managing the company.

An S-corp is required to file a tax return with the IRS each year. The S-corp’s tax return will report all the business’s income, deductions, gains, and losses for the year. In general, the S-corp does not pay taxes on the partnership’s income, but instead it is passed through to the shareholders through a Schedule K-1.


For additional questions related to entity formation and the taxation of various entities, please contact BMD Tax Law Attorney Tracy Albanese at tlalbanese@bmdllc.com or (330) 253-9195.

The Masks Are Back: New OSHA Regulations for Healthcare Employers

Employment Law After Hours is back with a News Break Episode. Yesterday, OSHA published new rules for healthcare facilities, including hospitals, home health employers, nursing homes, ambulance companies, and assisted living facilities. These new rules are very cumbersome, requiring mask wearing for all employees, even those that are vaccinated. The only exception is for fully vaccinated employees (2 weeks post final dose) who are in a "well-defined" area where there is no reasonable expectation that any person with suspected or confirmed COVID-19 will be present.

New OSHA Guidance for Workplaces Not Covered by the Healthcare Emergency Temporary Standard

On June 10, 2021, OSHA issued an Emergency Temporary Standard (ETS) for occupational exposure to COVID-19, but it applies only to healthcare and healthcare support service workers. For a detailed summary of the ETS applicable to the healthcare industry, please visit https://youtu.be/vPyXmKwOzsk. All employers not subject to the ETS should review OSHA’s contemporaneously released, updated Guidance on Mitigating and Preventing the Spread of COVID-19 in the Workplace. The new Guidance essentially leaves intact OSHA’s earlier guidance, but only for unvaccinated and otherwise at-risk workers (“at-risk” meaning vaccinated or unvaccinated workers with immunocompromising conditions). For fully vaccinated workers, OSHA defers to CDC Guidance for Fully Vaccinated People, which advises that most fully vaccinated people can resume activities without wearing masks or physically distancing, except where required by federal, state, or local laws or individual business policies.

Employer Liability for COVID-19 Vaccine Side Effects

As employers encourage or require employees to obtain a COVID-19 vaccine, they should be aware of OSHA recording obligations and potential workers’ compensation liability. Though OSHA has yet to revise its COVID-19 guidance in response to the latest CDC recommendations, OSHA has revised its position regarding the recording of injury or illness resulting from the vaccine. Until now, OSHA required an employer to record an adverse reaction when the vaccine was required for employees and the injury or illness otherwise met the recording criteria (work-related, a new case, and meets one or more of the general recording criteria). OSHA has reversed course and announced that it will not require recording adverse reactions until at least May 2022, irrespective of whether the employer requires the vaccine as a condition of employment. In its revised COVID-19 FAQs, OSHA states:

The New Rule 1.510 - Radical Change for Summary Judgement Procedure in Florida

In civil litigation, where both sides participate actively, trial is usually required at the end of a long, expensive case to determine a winner and a loser. In federal and most state courts, however, there are a few procedural shortcuts by which parties can seek to prevail in advance of trial, saving time, money and annoyance. The most common of these is the “motion for summary judgment”: a request to the court by one side for judgment before trial, generally on the basis that the evidence available reflects that a win for that party is legally inevitable and thus required. Effective May 1, 2021, summary judgment procedure in Florida has radically changed.

Vacating, Modifying or Correcting an Arbitration Award Under R.C. 2711.13: Three-Month Limitation Maximum; Not Guaranteed Amount of Time

In a recent decision, the Supreme Court of Ohio held that neither R.C. 2711.09 nor R.C. 2711.13 requires a court to wait three months after an arbitration award is issued before confirming the award. R.C. 2711.13 provides that “after an award in an arbitration proceeding is made, any party to the arbitration may file a motion in the court of common pleas for an order vacating, modifying, or correcting the award.” Any such motion to vacate, modify, or correct an award “must be served upon the adverse party or his attorney within three months after the award is delivered to the parties in interest.” In BST Ohio Corporation et al. v. Wolgang, the Court held the three-month period set forth in R.C. 2711.13 is not a guaranteed time period in which to file a motion to vacate, modify, or correct an arbitration award. 2021-Ohio-1785.