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Choosing a Hispanic Business Entity

24 Jul, 2012

Which of the five business-entity types—sole proprietorships, S corporations, C corporations, partnerships or limited liability—is right for your Hispanic business?
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Even if you have an established business, it may be time to rethink or revalidate your choice of business entity, especially if your personal or financial situation has changed since you started the company. Generally five business-entity types exist: sole proprietorships, S corporations, C corporations, partnerships and limited liability companies.

Sole Proprietorships

Sole proprietorships offer perhaps the easiest way to start a business. No attorney is needed nor is any legal paperwork filed with the state. However, sole proprietorships should be approached cautiously for two reasons. First, the self-employment tax is expensive. The first year your business posts a profit, the tax hit is 15.3 percent. Ouch! This is in addition to the income taxes you pay as an individual. Most new sole proprietors don’t even know about this tax until it’s too late. Second, sole proprietors are exposed to unlimited personal liability. You and your business are essentially one legal entity. If someone sues your business, in other words, they are actually suing you. All of your personal assets are at risk.

Current IRS tax breakout for Sole Proprietorships:
The 2010 Tax Relief Act reduced the self-employment tax by 2% for self-employment income earned in calendar year 2011. The self-employment tax rate for self-employment income earned in calendar year 2011 is 13.3% (10.4% for Social Security and 2.9% for Medicare). The Temporary Payroll Tax Cut Continuation Act of 2011 extended the self-employment tax reduction of 2% for calendar year 2012 so the rates for 2011 remain in effect for 2012. For self-employment income earned in 2010, the self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

For both 2010 and 2011, the first $106,800 of your combined wages, tips, and net earnings are subject to any combination of the Social Security part of self-employment tax, Social Security tax, or railroad retirement (tier 1) tax. Income you make after $106,800 will not be subject to the Social Security tax.

All your combined wages, tips, and net earnings in the current year are subject to any combination of the 2.9% Medicare part of Self-Employment tax, Social Security tax, or railroad retirement (tier 1) tax.

If your wages and tips are subject to either Social Security or railroad retirement (tier 1) tax, or both, and total at least $106,800, do not pay the Social Security part of the self-employment tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the self-employment tax on all your net earnings.

If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year.
Read more on Sole Proprietorships visit http://www.irs.gov/businesses/small/article/0,,id=98846,00.html

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About the author

Armando G. Roman
Armando G. Roman

Armando G. Roman CPA/PFS MBA contributes a regular column to LatinBusinessToday.com on financial and tax issues of importance to small and medium business owners. He has more than 25 years of experience counseling clients. He also has been a columnist for La Opinion, the nation’s largest Spanish-language daily newspaper. He is chairman of the board of directors of the Arizona Society of Certified Public Accountants, chairman of the Audit Committee of Maricopa Integrated Health Systems, and a board director of the Arizona Hispanic Chamber of Commerce. Contribution: articles, blogs.

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