CFO Choices

Small Business Set-Up: Legal Structure

Starting a small business can be exciting, but before jumping in, take time to consider what type of business structure will be best for your business. 

You can choose to be an “Informal Association” such as a sole proprietorship or partnership.  These types of entities require no filing with the Indiana Secretary of State.

1.  Sole Proprietorship: One person who conducts business for profit. The sole owner assumes complete responsibility for all liabilities and debts of the business.  TAX: The income of the business is reported as part of the owner’s personal income.
2. General Partnership: Two or more individuals as co-owners of a for-profit business. Partnerships should operate under a written Partnership Agreement to avoid future problems. All partners are responsible for the liabilities and debts of the partnership. TAX: Partnerships enjoy single taxation. Income is reported as part of each partner’s personal income.

Or you may choose to set-up a “Formal Association” with the Indiana Secretary of State.  Examples include:

1. Corporation: A legal entity which is created by filing Articles of Incorporation. The Corporation itself assumes all liabilities and debts of the Corporation. A corporation is owned by shareholders. A shareholder enjoys protection from the corporation’s debts and liabilities.  TAX: Income is taxed twice: 1) at the corporate level; and 2) at the employee level when a wage is paid or at the shareholder level when distributed as a dividend.
2. S-Corporation: After filing Articles of Incorporation, a Corporation may seek to obtain S Corporation status for federal income tax purposes. The income of an S Corporation is taxed only once: at the employee or shareholder level. To qualify, the corporation may not have more than 75 shareholders and must meet other certain Internal Revenue Service criteria. The corporation must submit IRS Form #2553 to the IRS. An S-Corporation is considered a corporation in all other respects and is subject to no additional or special filing requirements with the Secretary of State.
3. Limited Liability Company: An LLC is a formal association which combines the advantage of a corporation’s limited liability and the flexibility and single taxation of a general partnership. An LLC has members rather than shareholders. A member enjoys protections from the liabilities and debts of the LLC. Although not required by law, an LLC should operate under an Operating Agreement which is like a Partnership Agreement. TAX: If the LLC qualifies under IRS guidelines, it may be taxed only once, like a partnership, at the employee or member level, while not having the same restrictions as an S-Corporation.
4. Nonprofit Corporation: A corporation whose purpose is to engage in activities which do not provide financial profit to the benefit of its members. Such corporations must obtain nonprofit or tax exempt status from the IRS and Indiana Department of Revenue to be free from certain tax burdens.
5. Limited Partnership: A partnership with at least one General Partner and one Limited Partner. A limited partner’s liability is limited to the amount invested, while the General Partner(s) assumes all the liabilities and debts of the partnership. TAX: The income is taxed in the same manner as a General Partnership.
6. Limited Liability Partnership: A General Partnership which elects to operate as an LLP. To operate as an LLP, a Registration must be filed with the Secretary of State. Unlike a General Partnership, the partners in an LLP enjoy protection from many of the partnership’s debts and liabilities. TAX: The income of an LLP is taxed in the same manner as a General Partnership.

To form one of the Formal Associations, organizational documents must be filed with the Corporations Division of the Secretary of State.

Small Business Set-Up: Tax ID Numbers

When starting a new business, you may need to apply for tax identification numbers with various agencies.  Listed below are several common types:

Internal Revenue Service – Unless operating as a sole proprietorship or general partnership with no employees, businesses must obtain an Employer Identification Number. You may obtain this number by telephone or by filing Form SS-4 with the IRS.

Indiana Department of Revenue: Indiana imposes various taxes on businesses. For more information contact the Indiana Department of Revenue Taxpayer Services Division.  Common types include withholding tax (from employee pay checks), sales tax and corporate tax.

Department of Workforce Development: Businesses with employees generally have to pay state unemployment taxes and should register with the Department of Workforce Development to obtain an identifying number.  An Employer’s Desk Guide may be obtained by contacting the DWD at (317) 232-7436 or (800) 437-9136.

2010 IRS Mileage Rates

The Internal Revenue Service issued the 2010 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 50 cents per mile for business miles driven
• 16.5 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than last year’s. The mileage rates for 2010 reflect generally lower transportation costs compared to a year ago.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.