40.1 Forms of Doing Business

The legal form of your business determines the way you report business income and loss, the taxes you pay, the ability of the business to accumulate capital, and the extent of your personal liability. It is beyond the scope of this book to discuss the pros and cons of each form. The decision should be made with the services of a professional experienced in both the legal and tax consequences of doing business in a particular form as it applies to your current and future business prospects.

If you are going into business alone, your choices are: operating as a sole proprietor, incorporating, and forming a limited liability company (LLC). If you are going to operate with associates, you may choose to operate as a partnership, a corporation, or an LLC. If you are concerned with limiting your personal liability, your choice is between a corporation or an LLC. An LLC gives you the advantage of limited liability without having to incorporate.

As a sole proprietor, you report business profit or loss on your personal tax return, as explained in this chapter. If you are a partner, you report your share of partnership profit and loss as explained in Chapter 11. If you incorporate, the corporation pays tax on business income. You are taxable on salaries and dividends paid to you by the corporation. You may avoid this double corporate tax by making an S corporation election, which allows you to report corporate income and loss (11.14).

Filing Tip

Schedule F for Farming Business

If you are self-employed and your business involves farming, you report on Schedule F instead of Schedule C. However, much of the information contained in Chapters 40 through 45 applies to you as well.

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If you operate through an LLC with no co-owners, you report income and loss as a sole proprietor. If you operate an LLC with associates, the LLC reports as a partnership and you report your share of income and loss. However, under check-the-box rules, the LLC may elect on Form 8832 to report as an association taxable as a corporation.

Filing Tip

Did You Suffer a Loss?

Business persons and professionals with a 2012 net operating loss may get a refund of taxes paid in two prior tax years (more in some cases). If the loss is not fully eliminated by the income of the two prior years, the balance of the loss may be used to reduce your business income for up to 20 of the following years (40.18).

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