Need help with upcoming taxes

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Permalink Reply by Team Sta.rtUp.biz on November 15, 2008 at 1:12pm

This depends on legal structure of your business. The term “partner” in business is often used loosely instead of in the strict legal sense, so let’s go over some options:

Sole Proprietorship
If you open a business by yourself or with a spouse without legally forming a business entity such as a partnership, LLC, or corporation, you are a “sole proprietorship.” This is true even if you have a “doing business as” designation with your state.

For tax purposes, you would file your individual Form 1040 and use the Schedule C to report your business information. To the extent your business revenues exceeded expenses and other available deductions, you will owe tax on that profit. To the extent you have losses, you typically can offset these losses against other income you may have. As a sole proprietor, you also have self-employment tax on any profit.

Partnership
If you open a business with a partner who is not your spouse, or multiple partners, without legally forming a business entity such as an LLC or corporation, your status defaults to that of a partnership. You can also formalize a partnership by entering into a partnership agreement with your partners. There are various types of partnerships, including general partnerships, limited partnerships (LP), limited liability partnerships (LLP), and limited liability limited partnerships (LLLP).

For tax purposes, the partnership files a Form 1065, U.S. Return of Partnership Income, and the tax liability flows through the partnership to the individual partners. The partnership does not pay taxes itself, but rather the tax liability flows to the partners who report the information on their individual Form 1040s. Here again, active partners (as opposed to the passive partners in LPs, LLPs and LLLPs) have self-employment tax on any profit.

Limited Liability Company (LLC)
If you form an LLC, you can choose to be taxed as a sole proprietorship (if one member or married couple), partnership (if two or more members) or as a corporation (either C corporation or S corporation). State rules vary for LLC, but generally follow suit.

For tax purposes, if there is only one member, you will be taxed by default as a sole proprietorship. If there are two or more members, you will be taxed by default as a partnership. UNLESS you file a form with the IRS to make the election to be taxed as a corporation (either C corporation or S corporation).

Corporation
If you form a corporation, unless you choose to be an S corporation, you are a C corporation by default. Under state law, the laws do not distinguish between C corporations and S corporations, but tax laws do have different rules.

C Corporation
A corporation files a Form 1120 and pays tax at the corporate level. In addition, shareholders in the corporation pay tax at their individual levels (Form 1040) on any profit distributions (called dividends). So here, you are taxed twice, hence the common reference in business literature to "double taxation."

S Corporation
A corporation who elects to be treated under Subchapter S of the Internal Revenue Code is not subject to this “double taxation.” The corporation files a Form 1120S but does generally not pay income tax at this corporate level. Instead, the tax liability flows through to the partners, like in a partnership. Unlike a partnership, however, S corps are not subject to self-employment tax.

From both a legal liability and tax liability perspective, I would not generally recommend a sole proprietorship or a partnership. But regardless of what you are classified as this year, make sure to fulfill your tax filing obligations so you don’t add the headache of dealing with the IRS to other business concerns.

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Permalink Reply by Debbie Pipkin on November 17, 2008 at 9:48am

Thank you . Ours is a general partnership. Do you have any advise for us?

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Permalink Reply by Ted Williams on December 1, 2008 at 3:11pm

Hey Deb,

My wife and I formed our first LLC and it was going to be used for real estate investing.
I have not done any deals this year....getting close.
But I have a small income for taxes around 11-12k for the year.... because I utilized a line of credit from an angel investor.....upwards of 75k for the year i lived on this past year....invested about 30k in an online business only made around 5k; alot of expenses, seminars,travels,promoting the business.....

how do i go about the taxes my wife and I have the llc. Thanks for the input
Ted

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Permalink Reply by James Clarke on December 2, 2008 at 8:01pm

Hi Debbie,

First and foremost depending on what is your company formation for example is it an S-Corporation, Partnership or LLC etc. with the 1040ES it's estimated taxes that you have to submit to the IRS every quarter. Once you figure how much taxes you have to pay. Then your next step is filing your corporation taxes first which is due by March 15th after you submitted your corporation taxes to the IRS. The next step would be for example if your corporation is a S corp you would need the K1 to complete your personal tax return. If it is just you and a partner both of you need a copy of that K1 to complete your personal tax return.

I do hope that the information that I submitted help to some degree. Have a great day.......

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Permalink Reply by Debbie Pipkin on December 3, 2008 at 12:14pm

Thank yoy. I am still a little confussed but I am going to get my brother-in-law to help us. He knows a little about this.

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Permalink Reply by Debbie Pipkin on December 4, 2008 at 10:32am

We are a partnership just two of us. Do we have to do a 1040E each quarter? We haven't so far because no one has told me if we do.

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