Starting a Business: Forms, Taxes, and Costs

By Mark Hayes

Dreaming of launching your own company? The allure of entrepreneurship—being your own boss, pursuing your passion, and potentially reaping significant rewards—draws many to start a business. But the journey from vision to reality involves critical decisions, especially choosing the right business structure. Whether you’re considering a sole proprietorship, partnership, corporation, S-corporation, shell company, or another form, each option carries unique implications for taxes, liabilities, and setup costs. This article explores these business structures, their tax obligations, and associated costs to help you make an informed choice.

Understanding Business Structures

The structure you choose for your business shapes its legal, financial, and operational framework. Below, we dive into the primary business forms, their characteristics, and considerations for starting each.

1. Sole Proprietorship

A sole proprietorship is the simplest and most common business structure. You, the owner, are the business, personally responsible for all its operations, debts, and liabilities. This structure suits freelancers, consultants, or small-scale entrepreneurs who want full control and minimal setup complexity.

Setup Process: Registering a sole proprietorship is straightforward. Choose a business name (you can use your own name or a “Doing Business As” [DBA] name). File the DBA with your local county clerk or hall of records, typically costing $25–$50 depending on the state or city. You must also publish the DBA in a local newspaper for a set period (3–7 days in most areas), with publication fees around $30–$60. Obtain any necessary local business licenses or permits, which vary by location (e.g., $50–$200 annually).
Liability: You have unlimited personal liability, meaning your personal assets (home, savings, etc.) are at risk if the business incurs debts or legal issues.

Costs: Low startup costs—typically $100–$300 for filing, publication, and basic licenses. Ongoing costs include annual licenses and potential local taxes.

Taxes: Income is reported on your personal tax return (IRS Form 1040, Schedule C). You pay self-employment taxes (Social Security and Medicare, approximately 15.3% of net earnings) and income taxes on profits. Deductions for business expenses (e.g., office supplies, travel) are available, similar to other structures.
Pros: Easy and inexpensive to set up, full control over decisions, direct pass-through taxation.
Cons: Unlimited personal liability, limited access to capital, no perpetual existence (business ends if you die or close it).

2. Partnership

A partnership involves two or more individuals, corporations, or other entities sharing ownership. Partnerships are ideal for collaborators pooling resources and expertise. There are two main types: general partnerships and limited partnerships.

General Partnership:
- Setup Process: Like a sole proprietorship, register a DBA if using a business name (same $25–$50 filing and $30–$60 publication fees). Draft a partnership agreement (highly recommended, costing $500–$2,000 if prepared by an attorney) to outline roles, profit-sharing, and responsibilities. Obtain necessary licenses/permits.
- Liability: General partners are jointly and severally liable, meaning each partner is fully responsible for all business debts and obligations, even if caused by another partner.
- Costs: Startup costs range from $100–$2,500, including filing, publication, and legal fees for the agreement. Ongoing costs include licenses and potential legal consultations.
- Taxes: Partnerships file an informational return (IRS Form 1065), reporting income, losses, and deductions. Profits/losses pass through to partners’ personal tax returns (Form 1040, Schedule E). Each partner pays income and self-employment taxes on their share. Deductions for business expenses apply.
- Pros: Shared resources and expertise, relatively simple setup, pass-through taxation.
- Cons: Unlimited liability for general partners, potential for disputes, partnership may dissolve if a partner dies or leaves.
Limited Partnership (LP):
- Setup Process: Requires at least one general partner and one limited partner. File a certificate of limited partnership with the state (fees: $100–$800, depending on the state). A partnership agreement is critical ($500–$2,000). Publication requirements may apply in some states.
- Liability: General partners have unlimited liability; limited partners are liable only up to their investment.
- Costs: Higher than general partnerships, typically $200–$3,000 for filing and legal fees. Ongoing costs include annual state fees ($50–$500).
- Taxes: Similar to general partnerships, LPs file Form 1065, with income/losses passing through to partners’ personal returns. Limited partners may avoid self-employment taxes on profits, depending on their role.
- Pros: Limited liability for some partners, access to investment capital.
- Cons: Complex setup, general partners bear full liability, potential dissolution upon partner changes.

3. Corporations – Going Public

A corporation is a separate legal entity, treated as an individual under the law. It’s ideal for businesses seeking significant growth, outside investment, or plans to go public (issue stock on a public exchange). Corporations are complex but offer strong liability protection.

Setup Process: Incorporate by filing articles of incorporation with the state ($100–$500, depending on the state). Hire an attorney or use online services like LegalZoom ($200–$1,000 for assistance). Issue stock certificates and establish bylaws ($500–$2,000 for legal help). Going public requires additional steps: hiring investment bankers, filing with the SEC (Form S-1, costing $50,000–$500,000 in legal and underwriting fees), and meeting exchange listing requirements. Obtain licenses/permits.
Liability: Shareholders have limited liability, risking only their investment. Personal assets are generally protected.
Costs: Incorporation costs $300–$3,000 (filing and legal fees). Going public incurs $100,000–$1M in fees (legal, accounting, underwriting). Ongoing costs include annual state fees ($50–$800), SEC reporting ($10,000–$100,000/year), and compliance costs.
Taxes: C-corporations face “double taxation”: corporate income tax (21% federal rate) on profits, plus personal income tax on dividends or salaries paid to shareholders/owners. Business expense deductions are available.
Pros: Limited liability, access to capital via stock issuance, perpetual existence.
Cons: High setup and compliance costs, complex management, double taxation.

4. S-Corporations

An S-corporation combines corporate liability protection with pass-through taxation, ideal for small businesses wanting to avoid double taxation while maintaining limited liability.

Setup Process: First, form a C-corporation (articles of incorporation, $100–$500). Then, file IRS Form 2553 to elect S-corp status (free). Draft bylaws and issue stock ($500–$2,000 for legal help). Obtain licenses/permits.
Liability: Like C-corporations, shareholders have limited liability.
Costs: $300–$3,000 for incorporation and legal fees. Ongoing costs include annual state fees ($50–$800) and accounting costs for tax compliance ($1,000–$5,000/year).
Taxes: S-corps file Form 1120S, with profits/losses passing through to shareholders’ personal returns (Form 1040, Schedule E). No corporate income tax, but shareholders pay income tax on their share of profits. Self-employment taxes may apply to owner salaries but not profit distributions.
Pros: Limited liability, pass-through taxation, suitable for small businesses.
Cons: Strict eligibility (e.g., max 100 shareholders, U.S. citizens/residents only), complex compliance.

5. Shell Companies

A shell company is a business entity with no significant operations or assets, often used for financial maneuvers, holding assets, or as a vehicle for mergers/acquisitions. They’re controversial due to potential misuse (e.g., tax evasion), but legal when used properly.

Setup Process: Formed like a corporation or LLC ($100–$500 for filing). Often created in states like Delaware or Nevada for favorable laws. Legal assistance is common ($500–$2,000).
Liability: Limited liability, as with corporations.
Costs: $300–$3,000 for setup. Ongoing costs include annual state fees ($50–$800) and minimal operational expenses.
Taxes: If inactive, shell companies may have minimal tax obligations. If holding assets or generating income, they’re taxed as corporations or LLCs (depending on structure). Consult a tax professional to ensure compliance.
Pros: Flexibility for financial strategies, limited liability.
Cons: High scrutiny from regulators, potential for misuse, limited operational use.

6. Other Forms of Businesses

Limited Liability Company (LLC):

- Setup Process: File articles of organization with the state ($50–$500). Draft an operating agreement ($500–$2,000 for legal help). Obtain licenses/permits.
- Liability: Members have limited liability.
- Costs: $100–$3,000 for setup. Annual fees ($50–$800).
- Taxes: Flexible—taxed as sole proprietorship (single-member), partnership (multi-member), or corporation (if elected). Pass-through taxation is default.
- Pros: Limited liability, tax flexibility, simple management.
- Cons: Higher setup costs than sole proprietorships, varying state regulations.
Nonprofit Organization:
- Setup Process: File for incorporation ($100–$500), apply for IRS 501(c)(3) status ($275–$600). Draft bylaws and obtain licenses.
- Liability: Limited liability for directors/members.
- Costs: $500–$3,000 for setup. Ongoing compliance costs ($1,000–$10,000/year).
- Taxes: Tax-exempt if IRS-approved, but must file Form 990.
- Pros: Tax exemptions, eligibility for grants.
- Cons: Complex compliance, limited profit distribution.

Next Steps After Choosing a Structure

Once you’ve selected and formed your business structure, take these steps to launch:

Register Your Business Name: File your DBA (if needed) and publish it as required. Ensure the name is unique by checking state databases or trademark records.
Obtain an EIN: Apply for an Employer Identification Number (free) from the IRS for tax purposes and banking.
Open a Business Bank Account: Provide your EIN, DBA filing, and publication proof to the bank. Expect fees of $10–$30/month for business accounts.
Secure Licenses and Permits: Check local, state, and federal requirements (e.g., sales tax permits, zoning permits). Costs vary ($50–$1,000).
Consult Professionals: Engage an attorney for legal documents and a tax professional for compliance. Initial consultations may cost $200–$500.
Set Up Accounting: Use software like QuickBooks ($20–$50/month) or hire an accountant ($500–$5,000/year) to track finances and prepare taxes.

Key Considerations

Liability Protection: Sole proprietorships and general partnerships expose personal assets to risk. Corporations, S-corps, and LLCs offer better protection.
Tax Strategy: Pass-through entities (sole proprietorships, partnerships, S-corps, LLCs) avoid double taxation but require careful tax planning. Corporations face double taxation but suit businesses seeking public investment.
Scalability: Corporations and LLCs are better for raising capital and scaling. Sole proprietorships and partnerships suit smaller ventures.
Compliance: Corporations and S-corps have stricter reporting requirements. Sole proprietorships and LLCs are simpler but still require local compliance.

Conclusion

Starting a business is an exciting yet complex endeavor. Choosing the right structure—sole proprietorship, partnership, corporation, S-corporation, shell company, or LLC—depends on your goals, risk tolerance, and resources. Each structure carries distinct tax implications and costs, from the low-cost simplicity of a sole proprietorship to the high-compliance demands of a public corporation. By understanding these options and following the necessary steps—registering your name, securing an EIN, opening a bank account, and ensuring compliance—you can lay a strong foundation for success. Consult with legal and tax professionals to navigate complexities and protect your venture. With careful planning, your entrepreneurial dream can become a thriving reality.