“What legal status for my business in the United States?” is a frequently asked question by new business owners. While it may not be the most urgent question to begin with, it can become very problematic if the answers you receive are inaccurate. It is very easy to make a mistake when preparing your business plan and preparing for state and local tax forms. This article will explain some of the different legal status that you can have for your business, based on where you are located.
If your business is solely for profit, you are most likely considered a sole proprietorship. You are free to run your business however you wish, and generally have zero tax liability. If you use any part of your property, earnings or profits will be taxed according to your income level. It is important to consult a professional business tax attorney before taking this course, as they are best able to inform you of your options. Many individuals mistakenly think that if they have this status, they are not required to pay taxes, but they should still pay any income tax they owe.
A corporation is a legal entity separate from the owners. Corporations have different tax implications than sole proprietorships and are often more complex to understand. A C corporation will generally have lower tax rates than an S corporation, which are also called partnership corporations. Consult a professional business tax attorney before taking this route.
Do you have a US tax address or not? Generally speaking if you have a valid US tax address, then you are not required to register your business with the IRS, although it is highly recommended. If you do register your business, you are still responsible to pay Uncle Sam his yearly tax return. Some small business owners feel that if they start generating revenue, they don’t owe the government any money, so they never register. However, if you generate enough revenue to repay Uncle Sam, then you are required to register, regardless of whether or not you have a valid tax address.
Do you have a US tax ID number or not? Are you going to be taxed as a domestic or an international entity? These are all questions you should consider before deciding what legal status for your business in the US. International taxation requires some additional paperwork and is usually handled through a bank. If you are a sole proprietor you will not be taxed as a domestic, but you must be registered with the state in which you live to receive licensing, permits, and other legal requirements necessary to conduct trade.
As you can see there are some important details that you must research before you decide what legal status for your business in the US is best for you. If you are planning to sell your company, then it is absolutely essential that you know the tax status of your buyer. If you are registering your business as a sole proprietorship, then you must register with the state in which you live, as well as pay the appropriate taxes. International tax payments may also be necessary, depending on where your international customers are.