Publication 583 - What New Business Owners Need To Know
As a new business owner, you need to know your federal tax responsibilities. Table 1, below, can help you learn
what those responsibilities are. Ask yourself each question listed in the table, then see the related discussion to
find the answer.
In addition to knowing about federal taxes, you need to make some basic business decisions. Ask yourself:
What are my financial resources?
What products and services will I sell?
How will I market my products and services?
How will I develop a strategic business plan?
How will I manage my business on a day-to-day basis?
How will I recruit employees?
The Small Business Administration (SBA) is a federal agency that can help you answer these types of questions.
For information on how to contact the SBA, see page 26.
Forms of Business
The most common forms of business are the sole proprietorship, partnership, and corporation. When beginning a
business, you must decide which form of business to use. Legal and tax considerations enter into this decision.
Only tax considerations are discussed in this publication.
Sole proprietorships. A sole proprietorship is an unincorporated business that is owned by one individual. It is
the simplest form of business organization to start and maintain. The business has no existence apart from you,
the owner. Its liabilities are your personal liabilities. You undertake the risks of the business for all assets owned,
whether or not used in the business. You include the income and expenses of the business on your personal tax
Partnerships. A partnership is the relationship existing between two or more persons who join to carry on a trade
or business. Each person contributes money, property, labor, or skill, and expects to share in the profits and
losses of the business.
A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its
operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each
partner includes his or her share of the partnership's items on his or her tax return.
Corporations. In forming a corporation, prospective shareholders exchange money, property, or both, for the
corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its
taxable income. A corporation can also take special deductions.
The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when
distributed as dividends. However, shareholders cannot deduct any loss of the corporation.
S corporations. An eligible domestic corporation can avoid double taxation (once to the corporation and again
to the shareholders) by electing to be treated as an S corporation. Generally, an S corporation is exempt from
federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S
corporation's shareholders include their share of the corporation's separately stated items of income, deduction,
loss, and credit, and their share of nonseparately stated income or loss.
Limited liability company. A limited liability company (LLC) is an entity formed under state law by filing articles of
organization as an LLC. None of the members of an LLC are personally liable for its debts. An LLC may be
classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an
entity separate from its owner by applying the rules in regulations section 301.7701-3. For more information, see
the instructions for Form 8832, Entity Classification Election.
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