LEGAL REQUIREMENTS

The main drawback of a sole proprietorship is that the owner is personally liable for all the debts, taxes and claims of the business. This means that if the business fails, the owner is personally responsible for these debts.

A partnership is between two or more people who share in the profits, losses, property, and decisions of the business. Like a sole proprietorship, a partnership is fairly easy to set up, and the income of the business is taxed to the individual owners, but for some of the partners, the personal liability may be limited.

A corporation is a separate legal entity, authorized by law, that exists separate from the individuals who own or manage it. It has a life of its own which extends beyond that of the individual owners. It can own assets, incur debts, enter into contracts, pay taxes, and can be sued (has liability)

A corporation does have certain advantages, but it is more costly and timely to set up, and there are more legal requirements.

There are three types of corporations, C corporations, subchapter S corporations, and limited liability companies. These differ primarily in regard to taxation, profitability, and shareholder compensation.

If you decide you want to set up your company as a corporation, you will probably want to consult an attorney to determine which type of corporation is best suited to your business.

Licenses & Fees
Federal
If you are starting a small business, you will probably not require any federal permits or licenses (some exceptions are businesses that provide investment advice, prepare meat products, sell alcohol, tobacco, or firearms, and businesses in regulated industries, such as radio or television, utilities, and drugs).

However, you will require both a Federal and a State Identification number, if you plan to hire one or more employees. You can obtain this number through the Federal and State Departments of Revenue.

In most cases you will not need an Identification Number if you are a sole proprietor, and do not have any employees.

State and Local 
To find out what business licenses and permits are required by your state you will need to contact your state's Business License Information Office. For North Carolina, the office is located in Raleigh, 1-800-228-8443, (http://www.secretary.state.nc.us/blio/default.asp).

Some businesses, such as childcare, contractors, real estate, etc., may also require special certifications or special licenses and permits.

Some cities or counties also require privilege or occupational licenses, or Home Occupation Use Permits for home-based businesses. You can find our what is required for your city or county by contacting your city's Tax Collections Office.

If you are starting a sole proprietorship or partnership, you may also want to obtain a DBA (doing business as) name. You can apply for a name at your County Registrar of Deeds.

You do not require a DBA if you do business under  your own name, that is, Mary Smith.  However,  you will need a DBA if you plan to use the name Mary Smith's Hair Salon.

Taxes
Federal, State, & Local  Income Taxes

Sole Proprietorships or Partnerships

If you are a sole proprietor, or are a member of a partnership, the profits of the business, for Federal, State, and local income tax purposes (if applicable), are taxed as regular income to the owners on their individual federal and state tax returns.  (The owners do not receive wages, the profits of the business are considered their "income".)  In addition to their 1040, the owners must file a Schedule C (Profit or Loss from Business) at the end of the year.  

Depending on the type of expenses they deduct (e.g. depreciation, home office expenses, etc.), there may also be other tax forms required.  You may want to consult an accountant, the IRS, or the tax publications regarding these.

If you have employees you must withhold federal, state, and local taxes from all employees' wages, and remit these quarterly to the IRS.

Corporations

If your business is a corporation, you are considered an employee of the business, and are paid wages. These wages are deducted from the profits of the business as qualified expenses, and the business pays a corporate tax on the net amount.  The wages you receive are then taxed to you as regular income on your individual tax returns.

Corporations are required to withhold federal, state, and local taxes, if applicable, from all employees' wages, and remit these quarterly to the IRS.

Medicare & Social Security

Sole Proprietorships or Partnerships

In addition to income taxes, sole proprietors and partnerships are also required to pay self-employment taxes for Medicare and social security based on the net profits of the business (revenues minus qualified expenses), and make quarterly estimated tax payments to the Federal and State IRS, based on projected profits.  Failure to do so may result in a tax penalty.

You are required to pay both the employer's share as well as the employee's share of these taxes  However, since the employer's share is considered a business expense, half of these taxes are deductible as an adjustment to gross income on your 1040.

If you have employees, Medicare and social security taxes must be withheld from employees' wages and remitted quarterly to the IRS.

Corporations

A corporation pays the employer's share of all Medicare and social security taxes for all employees, and the employees' share is withheld from the employees' gross wages.  As with income taxes, Medicare and social security withholdings must be remitted to the IRS quarterly.

State Unemployment Taxes

Regardless of the type of business, if you have employees, you will probably have to pay state unemployment taxes.  Check with your individual state regarding the requirements.

Sales Tax
If your state has a sales tax, you will be required to collect state sales tax for products purchased by customers from your state. Sales to customers outside your state are not taxable.  These payments are usually distributed to the various counties within the state based on the location of the business.

Check with your state IRS regarding filing requirements. 

Insurance

Based on the size and type of business, you may also want to consider various types of insurance, such as hazard, fire, liability, or auto insurance.

Workmen's Compensation insurance may also be required if the business has more than a certain number of employees.  This again, varies by state.

Please contact us with any questions or comments.