You may work for a company or own your own, but however you do business, it’s done through some sort of business entity. If you work for someone else, you may not be all that concerned with what type of entity it is. But if you ever plan on owning your own company or running a side business even, you’ll want to be aware of the different entity options available to you. I’ll go over some of the main ones here.

The Sole Proprietorship

This is the simplest form of organization and the most prevalent. It represents a single-person ownership where the person essentially does business in his or her own name. It’s a very popular entity because there are no legal formalities involved for forming or dissolving a business. It offers simplicity of decision making (since there’s only one owner) and low organizational and operating costs. The major drawback of the sole proprietorship is that there is unlimited liability to the owner. In the event of unsettled debts or a lawsuit, the personal assets of the owner are not protected.

As a sole proprietorship, any profits (or losses) are taxed on the owners personal income tax filings. The income and deductions are reported on the Schedule C of the personal return. This makes the accounting of the business much simpler. It’s also important to note that many sole proprietors will register a DBA, or Doing Business As which allows the owner to operate under a name other than their own as well as open a business account with financial institutions.

The Partnership

This form of ownership is very similar to the sole proprietorship except that there are two or more owners. Most partnerships are formed by an agreement between the participants known as the articles of partnership. This type of entity also carries unlimited liability to the owners, however, it could present problems for owners with unequal personal wealth having to absorb the losses. A limited partnership can be utilized to get around the unlimited liability with general partners and limited partners though if you choose.

The tax situation for a partnership is also very similar to the sole proprietorship. Any profits and losses are passed through to the individuals personal tax returns. This again helps to keep the accounting of income and expenses relatively simple.

The Limited Liability Company (LLC)

This type of entity is a legal form of business that offers limited liability to its owners. This means that the owners liability is limited to the amount of their initial and subsequent investments in the company. It’s similar to a corporation, but is usually utilized by smaller companies with a limited number of owners. A sole proprietor my choose to eventually form an LLC, but it would still be treated as a sole proprietorship for income tax reporting purposes. An LLC with multiple owners/members, however, may choose to be treated as a partnership, C corporation, or S corporation for federal taxing purposes.

The Corporation

A corporation is the more complicated of the various business structures. It is a separate legal entity, or Juristic Person. Aside from providing limited liability to the owners, it also has other legal rights and obligations. For tax purposes, this type of entity files its own separate return. The distributions to the shareholders can then also be taxed on personal returns (think of dividends) making it possible for what’s typically called double taxation.

Under certain circumstances, a corporation may elect to be taxed under Sub-chapter S of Chapter 1 of the Internal Revenue Code. These are what are referred to as S corporations or an S-corp. In this instance, income or losses are passed through to the shareholders and taxed only once on personal returns. Certain qualifications, however, must be met for this status.

This isn’t intended to be an exhaustive and detailed list, but hopefully it has been helpful in explaining some of the main differences between these various business entities.

I’ve been quite busy recently with various things outside of work like the installation of a new floor and various other responsibilities. Last night, however, I decided to take some time to begin my tax preparation.

I used to do all my taxes by myself with the help of Turbo Tax, but I went to a CPA last year after having acquired a rental property. I wanted to make sure that everything was done right including depreciation, and I also wanted to make sure that I had some experience looking over all the deductions that I was going to take. The last thing I need is to get audited having done everything myself.

I got most everything entered into the tax organizer that I receive, but I still have a few outstanding questions that need to be answered before I can send everything off to the CPA and have it filed. Hopefully I’ll be able to finish up soon so I can move on to all the other things I need to get done before this summer comes around and I move off to school.

This is the third in my series that details why I like real estate. If you haven’t yet, take a look at Part I and Part II where I talk about control and leverage.

It’s no secret that real estate has great tax benefits, but they seem to be largely ignored sometimes and often downplayed. When you look at real estate as an investment and compare it to other investment options such as the stock market, you can’t ignore the tax incentives you get with real estate. They can significantly add to the bottom line of your investment.

First off, let me say that I’m not a tax expert, but I do have a rental property and have firsthand experience with the benefits that I’m talking about. They’re real and can be used by anyone who is willing to learn and seek professional advice. So now let’s talk about some of the specifics.

When you operate a rental property, it is a business and is able to be treated as such. Expenses that are associated with the property are deductible from any income that the property generates. It shouldn’t come as a surprise that the mortgage interest of any loans on the property are deductible. You can also deduct any expenses associated with maintenance of the property. Another great deduction is any travel associated with the property. For example, if the property is out of state from where you live, you can deduct the cost of the plane ticket or the mileage needed to visit it. This is something that not everyone is aware of, but can be a great perk.

You are also able to depreciate the property over a set number of years which is different depending on whether the property is commercial or residential. For residential properties it is depreciated over 27.5 years. Basically this means that you take the purchase price of the property and divide it by 27.5; this is the amount that you can deduct in any given year. This is what is called a paper loss. You’re deducting an amount of money that you never really spent, it just occurs on paper. Using this deduction you can actually offset some of your positive cash flow and essentially give yourself some tax free earnings.

These are just some of the tax benefits associated with real estate, and every property will have a little bit different scenario. If you happen to also take a real estate course or seminar, you can deduct the cost of it as well. All of these tax benefits add another element that should be considered in your comparison of investments, and they’re another reason that I like real estate.

I was paying a few bills yesterday and for some reason took a closer look at my water bill. It only comes every three months since that’s just the way they choose to bill it. I’m all for it since I don’t have to write a check and use a stamp every month, but that’s neither here nor there. What struck me was the breakdown of all the charges:

Customer Charge: 10.23
Usage Charge: 24.25
Primacy: 0.27
Fire Hydrant Service: 6.21
Service Line Protection Charge: 3.00
Gross Receipts Tax: 2.14

Grand Total: 46.10

I’ll preface the following comments by saying that $46 is really not all that much when you consider that it’s for 3 months worth of service. Even so, there are a few things that I have a difficult time getting my head around. For starters, I noticed that my actual water usage only accounts for about half of my total bill. This is the only thing that I have control over. If I were to cut my usage by 20%, I would only see a cost savings of 10%.

And what exactly is Primacy? It took a little digging, but I finally found a pdf that explains what the primacy fee means in Missouri. It supports the efforts to ensure that we’re provided adequate water that is safe to drink. I thought that was just part of what we were paying anyway, but apparently it needs to be a separate line item.

I was also surprised to see the Fire Hydrant Service charge. I have yet to use a fire hydrant ever, and once again thought that these were maintained and paid for with general tax dollars. I also can’t imagine that it takes $2 per month from every Missouri resident to pay for fire hydrants that seem to be to be pretty low maintenance.

Have you ever taken the time to look over your bills and all of the line items that you’re being charged? Were you surprised by what you found? I don’t really think there’s anything that I can do about any of these charges, but they are a little perplexing.

1. With all the fear of recession in the market and in the economy as a whole, it was only a matter of time before the government steps in. And true to form, they’re now coming in after the problem has already been in full force for a while, and their “solution” won’t take effect until much later anyway. But who wouldn’t want to get a tax refund check?

2. I’m pretty much finished with the transition of my other blog, The Milk Crate, to a Wordpress platform. At times it was quite frustrating, but the learning experience was great. This blog will also be making the change shortly, but I’m waiting on a domain name transfer at the moment. Any feedback you have of the new site once it’s finished will definitely be welcome. It is, after all, a site for all of you.

3. I’ve talked about slick marketing before, and I’ve run across an article on Yahoo about how stores trick you into spending more. The double discount is something I’ve seen people get fooled by time and time again.

1. With all the politics going on right now, perhaps you’d like to take a look at some of the candidate’s finances. CNN Money has a bit called Millionaires in Chief and goes through seven of the candidates. Interesting to know for sure, but the suggestions at the end are kind of useless. They’ve obviously done rather well for themselves on their own.

2. This time of year a major focus is on giving. An article at MSN Money, however, talks about the financial benefits of giving. Give and Grow Rich mostly covers the issue of tax deductions for charitable contributions. It’s one thing to already know this, but another to know the details of what’s allowed and what isn’t.

3. This Christmas, one gift has certainly garnered most of the attention. I’m speaking here of the Nintendo Wii. And Mrs. Micah goes into a discussion about whether the lack of Wiis will drive demand for other gaming systems. I have to say that I believe it is, but I don’t think that Nintendo is intentionally keeping the supply low. An interesting read if you’re caught up in the Wii craze.

4. Another Fiscal Musings Throwback (FMT): Way back when, I explained why I don’t keep an income statement for myself. I also explain how I handle all my income. The process is simple and doesn’t require any budgeting or spreadsheets. It ensures a positive financial future, plain and simple.

And now for a little humour for the weekend. I recently posted a video at The Milk Crate that you may have already seen, but I laugh every time anyway. You can’t help but laugh as well because the newscasters just won’t stop laughing. Anyway, check it out.

1. With the end of the year (quickly) approaching, you may want to take one more look at your tax situation for 2007. Here’s an article from MSN about 10 tax goofs many of us keep making. Also, to reduce your coming tax bill, consider upping your 401K contributions on your last paycheck or two.

2. A big issue among many young people and in general is how to combine your finances when you’re a couple. U.S. News and World Report put out an article dealing with His and Her Accountability. It talks mostly about the benefits of having separate finances at least on some level. While I’m not a proponent of that way of handling things, I don’t mind at least hearing another point of view.

3. Being friendly may not just make you feel good, but it may also pay great dividends in the end. At least that’s what one couple found out when their friend passed away. They were left $20 million in her will. The family of the deceased wasn’t very happy, and they appealed in court. But hey, maybe if they had been nicer and kept in better contact… sometimes the nice guy doesn’t have to finish last.