Business Practice Models Minnesota Psychological Association September 18, 2015 Denise Kautzer, MA, LPCC, CPA

Entity Options Sole Proprietorship Partnership – General – Limited (LLP) Limited Liability Company (LLC) Corporation – Subchapter S Corp – C Corp

Sole Proprietorship Business that legally does not have a separate existence from its owner. Advantage – Simple, inexpensive way to get started. Disadvantages – Personal assets at risk.

Sole Proprietorship Taxation Profit/losses flow through to the owner’s individual tax return Profits taxed at owner’s individual income tax rate. Self employment taxes are due on net income rate 15.3%, maximum $18,130 Quarterly estimated tax payments may be required.

General Partnership A legal form of business operation between two or more individuals who share management and profits. Advantage – Partnership doesn’t pay tax on income. Profits/losses pass through to individual partners. Disadvantages – General partners are personally liable for partnership obligations, debt and wrongful acts of colleagues. – Subject to self-employment taxes. – More complicated to establish.

Partnership Agreement Some issues to be addressed – How business decisions are made. How business income is distributed. How disputes are resolved. How a buyout is handled. How death of a partner is handled.

Limited Liability Partnership A business organization that allow limited partners to enjoy limited personal liability while general partners have unlimited personal liability. Advantages – Liability limited to extent of investment in the partnership. – Do not pay self-employment taxes. Disadvantages – Do not have management control. – Complicated to set up.

Partnership Taxation Partnership is not a taxable entity. Earnings, deductions and credits flow through to partners and is taxed at their individual rate. Partnership must file an informational return with the IRS annually along with schedules of each partner’s share of earnings, deductions and credits. Quarterly estimated tax payments may be required.

Limited Liability Corporation A form of business organization that combines the tax treatment of a “pass-through entity” with the limited liability of a corporation. Advantage – Risk of loss generally limited to the amount of investment. – Flexibility in choosing tax status (corporation, partnership, or sole proprietor). – No limit on the number of members. Disadvantage – Complexity and cost of formation.

Limited Liability Company Taxation A one member LLC is treated similar to a sole proprietorship. A two or more member LLC is treated as a partnership. Form 8332 Entity Classification Election must be filed with the IRS to be classified as a corporation.

Subchapter S Corporation A special form of corporation that allows protection of limited liability but direct flow-through of profits and losses to shareholders. Advantages – Not subject to double taxation. – Payments to owners can be divided between wages and dividends. – Employers share of Social Security and Medicare can be deducted as a business expense. – Risk of loss generally limited to investment. Disadvantages – Limit to number of shareholders. – Complex and costly to set up.

Subchapter S Corp Taxation Subchapter S election made by filing Form 2553 with IRS 2months and 15 days after the first day of the taxable year. S Corp pays no taxes itself. Income, expenses and other tax items pass through to the shareholders. Required to file an annual informational tax return and separate forms for each shareholder to report share of earnings and deductions.

C Corporation A legally separate taxpaying entity from its owners. Advantages - Limited liability protection. Disadvantages – Double taxation – Complex and costly to establish and continue to operate.

Independent Contractor A person hired to do work who is not an employee. Set hours and fees. Benefits not provided. Taxes are not deducted. Equipment, training and payment of out-of-pocket costs are not provided. Written agreement specifically identifies the individual as an independent contractor.

Accounting Considerations Cash vs. accrual Maintaining separate financial records and a separate bank account. Meeting quarterly/annual reporting and payment requirements. Decide whether you can do this yourself or whether you need professional assistance.

For More Information Nolo.com – Legal site that provides step by step guide on how to set up various businesses in Minnesota. Internal Revenue Service – Publication 334, Tax Guide for Small Businesses – Publication 541, Partnerships – Publication 3402, Taxation of Limited Liability Companies – Publication 542, Corporations