By Thomas Van Blunk and Jaclyn Martello

When it comes to the formation of a business there are many rules and regulations that must be followed. These procedures can change widely depending on the type of business you decide to form and its location within the country. This blog provides a basic overview on how to form a business and includes key rules and regulations related to business formation.

When starting a business, you must first decide what kind of business you want to form. There are many types of business structures, but the most popular ones are: 

• Sole Proprietorship
• Partnership
• C Corporation
• S Corporation
• Limited Liability Company

Sole Proprietorship

A sole proprietorship is an unincorporated business that is owned and operated by one person. There are various tax forms that a sole proprietorship may be required to file in both the federal and state governments.

According to the IRS, here are some forms a sole proprietorship may need to file:

Type of Tax	Forms
Income Tax	1040, U.S. Individual Income Tax Return or 1040-SR, U.S. Tax Return for Seniors Schedule C (Form 1040 or 1040-SR), Profit or Loss from Business
Self-Employment Tax	941, Employer’s Quarterly Federal Tax Return 943, Employer’s Annual Federal Tax Return for Agricultural Employees 944, Employer’s Annual Federal Tax Return
Estimated Tax	1040-ES, Estimated Tax for Individuals
Social Security and Medicare taxes and income tax withholding	941, Employer’s Quarterly Federal Tax Return 943, Employer’s Annual Federal Tax Return for Agricultural Employees 944, Employer’s Annual Federal Tax Return
Providing information on Social Security and Medicare taxes and income tax withholding	W-2, Wage and Tax Statement (to employee) W-3, Transmittal of Wage and Tax Statements (to the Social Security Administration)
Federal Unemployment (FUTA) Tax	940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
Filing information returns for payments to nonemployees and transactions with other persons	Depends on the business
Excise Taxes	Depends on the business

Your local state’s tax website will have all the information you will need to file the proper state tax forms.

Partnership

A partnership is a formal business relationship between two or more people with the purpose of forming a business or trading. In a partnership, all partners are responsible for sharing both the risks and the benefits associated with managing and contributing to the business. The IRS regulates how income is reported for a partnership. To properly report income to the IRS, a partnership must complete and send an annual information return, which reports income, expenses, and other operational transactions; although, partnerships do not need to pay income tax with these returns. Since each partner reports their share of profit and loss on their own individual tax return, it’s important for partners to get K-1s to provide the necessary information to file their personal income taxes. A partnership also requires a mutual agreement, whether oral or written, that is accepted by all the partners. This agreement can be modified after the end of the partnerships tax year. 

According to the IRS, here are some forms a partnership may need to file:

Type of Tax	Forms
Annual Return of Income	Form 1065, U.S. Return of Partnership Income
Employment Taxes	Form 941, Employer’s Quarterly Federal Tax Return For farm employees: Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees Federal unemployment (FUTA) tax: Form 940, Employer’s Annual FUTA Employment taxes: Depositing and reporting employment taxes 1099-NEC if the business has nonemployee compensation
E-file	1099 E-file
Excise Taxes	Form 965-A, Individual Report of Net 965 Tax Liability Form 8990, Limitation on Business Interest Expense Under Section 163(j)

In addition, if you are a partner in a partnership, the IRS may have you fill out the following forms: 

Type of Tax	Forms
Income Tax	Form 965-A, Individual Report of Net 965 Tax Liability Schedule E (Form 1040), Supplemental Income and Loss Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors
Self-Employment Tax	Schedule SE (Form 1040), Self-Employment Tax Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors
Estimated Tax	Form 1040-ES, Estimated Tax for Individuals
International Tax	Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations and related schedules Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR) Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships

Your local state’s tax website will have all the information you will need to file the proper state tax forms. 

Corporation

Another popular business structure is a corporation. The most common corporations are C corps and S corps. When forming a corporation, prospective shareholders exchange money, property, or both for the corporation’s capital stock. A corporation will have to file articles of corporation in its local state to become a formal corporation. A corporation usually gets the same deductions as a sole proprietorship and may qualify for some special deductions. A C corporation is seen as a separate taxing entity for the federal income tax.

A corporation does the following:

• Conducts business.
• Realizes profit and loss.
• Pays taxes.
• Distributes profits to the shareholders as dividends.

Profits generated by a corporation are taxed when earned at the corporate tax rate. A corporation’s taxable income can be offset by the business’s expenses. As for shareholder income, a portion of the corporation’s earnings are distributed to the shareholders as taxable dividends. These dividend distributions are then considered to be taxable income to the shareholders and are taxed at individual rates. The shareholder’s resulting income can be decreased by personal liabilities, only, and not the business’s liabilities. It’s also important to remember that distributions to shareholders are not considered to be a deduction, or expense for the business; a corporation’s income cannot be reduced by its distributions. As you can see, this creates a double tax on a corporation’s profits.

C Corporation

According to the IRS, here are some forms a C corporation may need to file: 

Type of Tax	Form
Income Tax	1120, U.S. Corporation Income Tax Return
Employment Taxes	941, Employer’s Quarterly Federal Tax Return or 943, Employer’s Annual Federal Tax Return for Agricultural Employees (for farm employees) 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
Excise Tax	Depends on business

Your local state’s tax website will have all the information you will need to file the proper state tax forms. 

S Corporation

An S corporation differs from other corporations by allocating its day-to-day profits and expenses directly to its shareholders for federal tax purposes. It is then the duty of the shareholders to report the S corp’s income and losses on their personal tax returns. This enables shareholders to avoid paying the double tax on the corporate income, since they report the taxes of the corporation.

For a corporation to be recognized as a S corporation, they must meet the following requirements as listed by the IRS:

• Must be located within the United States.
• Shareholders must be individuals, certain trusts, and estates.
• Shareholders cannot be partnerships, corporations, and foreign residents.
• Must have no more than one hundred shareholders. 
• Only give out one class of stock.
• Not be a corporation that is non-eligible depending on what kind of business they do.
• Must fill out and submit Form 2553, Election by a Small Business Corporation and have all shareholders of the corporation sign it.

According to the IRS, here are some forms an S corporation may need to file:

Type of Tax	Form
Income Tax	1120-S 1120-S (Sch. K-1)
Employment Taxes	941 or 943 (for farm employees) 940
Excise Taxes	Depends on business

In addition, if you are a shareholder of an S corporation, you may need to fill out the following forms:

Type of Tax	Form
Income Tax	1040 or 1040-SR and Schedule E and other forms referenced on the shareholder’s Schedule K-1
Estimated Tax	1040-ES

Your local state’s tax website will have all the information you will need to file the proper state tax forms. 

Limited Liability Company

There is one type of business with a structure permitted only by state laws, and this is a Limited Liability Company (LLC). You can find information about your state’s laws and regulations on your state’s tax website. LLCs have minimal regulations regarding ownership, which allows for an unlimited number of owners. In addition, many states also recognize single member LLCs. Since LLCs are formed by state statute rather than federal, the IRS can classify them as a partnerships, corporations, or a part of the owner’s individual income tax return. This classification is dependent upon the choices the LLC has made and the number of owners it has. This classification also determines whether the LLC will be required to pay taxes that non-LLCs in its classification must pay. If an LLC wants to change its classification, they can do so by filing Form 8832, Entity Classification Election.

How To Form a Business

Here is some general information on starting a business:

• Register your business on your home state’s registration page
  • Choose your name and business structure
• Apply for an EIN or employer ID number – this is free and quick on the IRS website
• Apply for a state tax ID if applicable
• Keep good records of day-to-day operations to back-up your federal return
• Determine tax year
  • Calendar year (January to December)
  • Fiscal year (52-53 weeks)

Once you have completed the steps above, you can file your first tax return of the year. 

This information has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions regarding the formation of a business, please do not hesitate to contact us at Lear & Pannepacker.

By Thomas Van Blunk and Jaclyn Martello

In today’s world, starting a business involves taking risks, and there are times when business dissolution becomes necessary. Dissolving a business requires careful planning and execution to ensure that all legal, financial, and tax obligations are properly addressed. This blog helps to identify the necessary steps and paperwork to dissolve a business.

If your business is a Limited Liability Company (LLC) or a corporation, the shareholders must first approve the dissolution before the process of closing the business can begin. Depending on the state, you may need to file a certificate of dissolution in addition to filing your local and state taxes for the last time. For more information regarding state requirements, please go to your state’s website for businesses. 

Although the business is being dissolved, its tax obligations do not immediately end. The federal government will need a final return for the business. Each business type has its own filing requirements for the tax year of dissolution, except for an LLC, which would follow the requirements associated with its classified business type. 

Sole Proprietorship

Type of Tax	Form/Reasoning
Income Tax	Schedule C (Form 1040 or Form 1040-SR) – used to report the year’s final income and expenses
Sale of Business Assets	Form 4797, Sales of Business Property – filed annually to report the sale or exchange of business property It is mandatory to file this form if closure of the business causes the business use of an eligible property under Section 179 to drop to 50% or less Form 8594, Asset Acquisition Statement – required filing if a business is sold
Self-Employment Tax	Schedule SE (Form 1040), Self-Employment Tax – required filing if the business’s net earnings are $400 or more for the year

Partnership

Type of Tax	Form/Reasoning
Income Tax	Form 1065, U.S. Return of Partnership Income Capital gains and losses are reported on Schedule D Check the “final return” box so the IRS won’t expect a return in future years – it’s near the top of the front page of the return, below the name and address Check the “final K-1” box on Schedule K-1PDF
Sale of Business Assets	Form 4797, Sales of Business Property – filed annually to report the sale or exchange of business property It is mandatory to file this form if closure of the business causes the business use of an eligible property under Section 179 to drop to 50% or less Form 8594, Asset Acquisition Statement- required filing if a business is sold

C Corporation

Type of Tax	Form/Reasoning
Sales of Business/Assets	Form 966, Corporate Dissolution or Liquidation – required filing if you adopt a resolution, plan to dissolve the corporation, or liquidate any of the business’s stock Form 4797, Sales of Business Property – filed annually to report the sale or exchange of business property It is mandatory to file this form if closure of the business causes the business use of an eligible property under Section 179 to drop to 50% or less Form 8594, Asset Acquisition Statement – required filing if a business is sold
Income Tax	Form 1120, U.S. Corporate Income Tax Return – must still be filed for the year of business closure Report capital gains and losses on Schedule D

S Corporation

Type of Tax	Form/Reasoning
Sales of Business/Assets	Form 966, Corporate Dissolution or Liquidation – required filing if you adopt a resolution, plan to dissolve the corporation, or liquidate any of the business’s stock Form 4797, Sales of Business Property – filed annually to report the sale or exchange of business property It is mandatory to file this form if closure of the business causes the business use of an eligible property under Section 179 to drop to 50% or less Form 8594, Asset Acquisition Statement – required filing if a business is sold
Income Tax	Form 1120-S, U.S. Income Tax Return for an S corporation – must still be filed for the year of business closure Report capital gains and losses on Schedule D Check the “final K-1” box on Schedule K-1

All Business Entities

Type of Tax	Form/Reasoning
Employment Tax	Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return – must be filed for the quarter in which you make final wage payments Check the box to tell the IRS your business has closed and enter the date final wages were paid on line 17 of Form 941 or line 14 of Form 944 Attach a statement to the return showing the name of the person keeping the payroll records and the address where the records will be kept Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return – must be filed for the calendar year in which you paid final wages Check box “d” in the Type of Return section to show that the form is final. Give a W-2 to each employee W-3 Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips – file if needed
Other Taxes	Any outstanding taxes must be paid Form 1099-NEC, Nonemployee Compensation, and Form 1096, Annual Summary and Transmittal of U.S. Information Returns – may be required if employing contract workers

You may be required to pay local and state taxes one last time. Please visit your state’s website for more information. You also may need to close any pension or retirement plans that were being offered to employees. Finally, you must cancel your employer identification number or EIN by sending the IRS a letter with the following information:

• Legal name of the business
• The business EIN
• The business address 
• Reason for closing 
• Original EIN notice if it was kept

Send your EIN cancellation letter and the original EIN notice if available to:

Internal Revenue Service 
Cincinnati, OH 45999 

Once all necessary returns have been filed and taxes have been paid, your business will be formally shut down. It is recommended to keep your business records for at least seven years after closing.

This information has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions regarding the dissolution of a business, please do not hesitate to contact us at Lear & Pannepacker.