Construction and Contracting Business. Entrepreneur magazine
decisions yourself and sell the business when you choose. There are also few legal costs, little paperwork, no formal business requirements, and no corporate tax payments.
2. Partnership. Formed when two or more individuals enter an agreement to manage a business, a partnership does not protect the individual liability of the owners. The partners manage the business and are personally liable for debts and obligations of the business. Like an S corporation (see below), the partnership does not pay taxes because the profits and losses are passed on directly to the partners. From a legal perspective, partnerships are easy to form. Many partnerships are very successful if the partners have a strong bond and their strengths complement each other.
3. Limited liability company (LLC). Increasingly popular, this is a hybrid structure that combines the limited liability of a corporation (S or C) with the tax advantages and flexibility of a partnership. The company is owned by members, as opposed to stockholders, and profits and losses are passed on directly to them. In some cases, a member may contribute services rather than money and, in turn, receive an interest in profits and losses.
4. S corporation. Usually reserved for smaller companies with fewer than 100 shareholders, an S corporation provides limited personal liability to its shareholders (owners) so that if the corporation is sued, the personal assets of the shareholders are protected from the lawsuit. The other significant issue with S corporations is that the corporation itself does not pay income taxes. All profits and losses are passed through to the individual shareholders according to the share of the stock each owns. Shareholders are liable for taxes even if they did not receive cash income from the company. The company itself is managed by a board of directors that appoints officers to take responsibility for day-to-day operations.
5. C corporation. Most large companies in the United States are C corporations. Like an S corporation, shareholders are protected from lawsuits and the company is managed by a board of directors. However, the corporation is an entity unto itself, which is taxed on its profits, and the shareholders are taxed on any dividends they receive. Shareholders must be aware that dividends are paid on after-tax profits, which results in double taxation because the shareholders are also personally liable for taxes on the dividends they receive.
When deciding on a business structure that meets both your business and personal needs, the entrepreneur should consider the following:
There are two types of accounting methods that are used by small businesses: cash accounting and accrual accounting. The IRS has placed some restrictions on the use of the cash method, so the new contractor is advised to consult with his accountant to decide which is best for his business. While most accounting software programs use the accrual method, it is usually a simple matter for a good accountant to make the year-end adjustments needed to prepare an accurate tax return based on a cash accounting system.
The difference between the two methods is basically one of timing. When using the cash method, revenue is recognized and recorded on the company books when the money is actually received, and expenses are recognized when payment is made. However, when using the accrual method, revenues and expenses are recorded when incurred. Consider the following information:
K&K Contractors—Cash Accounting vs. Accrual Accounting
The effect on the income statement of K&K Contractors varies by the accounting system used:
1. Cash accounting. Neither the $2,500 expense nor the $5,000 income is included in the 2015 income statement because the actual payment and receipt took place in 2016.
2. Accrual accounting. Both the $2,500 expense and the $5,000 income are included in the 2015 income statement even though the cash was not received until January 7 and the expense not paid until January 30.
As you can see, the accounting method used can have an effect on your taxes, both positive and negative. Both methods, however, offer legal strategies