Structure your business

Business Structures

Determine the best structure for your business

Sole proprietorship: report business activities on personal income tax returns. If you risk substantial liability in your business, consider some form of incorporation, LLC, or LLP to protect your personal assets

Business partnership: also avoid corporate double taxation and usually allow more flexibility in distributions than either a C or S corporation. Family limited partnerships (FLPs) offer many benefits: You can split income with your children and realize estate tax savings, while continuing to control assets transferred to the partnership. However, it is important to ensure that the FLP is carefully structured, as the IRS monitors FLPs closely.

Incorporated business: C Corporations are taxed as entities separate from their shareholders. The corporation pays taxes, and you pay taxes as an employee. Investors are taxed on the dividends they receive. Salary paid to you and other shareholders must be reasonable, or a portion of it may be reclassified as a nondeductible dividend payment. If earnings are accumulated beyond the corporation’s reasonable needs, an additional tax may be imposed on these earnings.

S Corporations may have between 1 and 100 shareholders, which can include individuals, estates, certain trusts, and tax-exempt organizations. Income and losses are passed through to shareholders, thus avoiding the double taxation inherent in a C corporation. However, S Corporations are governed by strict rules.

Limited Liability company: LLCs and LLPs offer pass-through taxation and limited liability. They have a flexible structure, which allows any entity to be an owner, including a corporation; investments in other entities are not limited. Special allocations of income and losses are possible.

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Federal Employer Identification Number (FEIN)

If you hire employees, you must apply for a Federal Employer Identification Number. If your business is a sole proprietorship, a FEIN may be helpful, but is not necessary.

Register Your Business

After you determine your business structure, you can begin the process of registering your business. PA Business One Stop Shop overviews the registration process in the state of PA and even includes a survey to get your own personalized registration checklist based on the aspects of your unique business. If you are operating your business in the city, you will also need to register in the city of Philadelphia.

After registering your business and deciding on a name, you need to open a business account to manage your cash flow.