Taxes should be one of the first things you look at before selecting the right structure for your business.

Few things have a more lasting effect on your business than taxes, and federal tax laws vary wildly from one business structure to the next. Understanding those tax requirements before you form your company is supremely important. Often, entrepreneurs look only at legal liability and choose a business structure with hefty tax burdens. To help new entrepreneurs wade through the mess, the list below outlines the most common tax requirements for sole proprietorships, partnerships, C corporations, S corporations and LLCs.

Sole Proprietorship
Many entrepreneurs start their businesses as sole proprietorships. This is certainly the simplest way to begin, since there isn't much bureaucracy to navigate. On the positive side, you maintain complete control of the business and reap all the profits. On the negative side, you're liable for the business. If the business is sued or has a hefty tax debt, you are financially responsible.

From a tax perspective, the IRS views you and your business as one and the same. The business profits are reported on your personal income tax filings, under your Social Security number, and the income will be taxed at your standard personal income rate. You are responsible for filing form 1040, in addition to a 1040 ES Declaration of Estimated Tax For Individuals. You also must pay self-employment taxes on Schedule SE of form 1040, providing information on Social Security, Medicare and unemployment taxes.

Partnership
Partnerships are another common business structure for new entrepreneurs. Each partner may have a variety of responsibilities, depending on how you structure the partnership. As a partner, you have complete control over decision-making and profits, just as a sole proprietor does. Along with this control comes liability, but depending on how you organize the partnership, financial liability may not be equally shared.

From a tax perspective, your partnership is not a separate tax entity. You will file an annual informational return (reporting all income, deductions, gains and losses) on behalf of the business; but all profits and losses are passed through to you and your partners and are reported on your respective tax returns.

As a partner, you are not an employee of the company. Therefore, the business must supply copies of Schedule K-1 (Form 1065 U.S. Return of Partnership Income) to you and your partners. You are responsible for reporting your share of income tax on form 1040, and for paying all estimated taxes and employment taxes.

C Corporation
Some entrepreneurs prefer the safety and security of incorporating. Once formed, C corporations become independent legal entities, completely separate from you. Therefore, you probably will not have any personal liability resulting from the corporation's actions.

When it comes to taxes, a corporation has its own tax identification number and pays taxes just like an individual. An annual form 1120 U.S. Corporation Income Tax Return must be filed, and periodic estimated taxes must be paid. Your corporation is entitled to the same deductions as a sole proprietor and can take additional special deductions only available to corporations. Sounds great, right?

Well, before you rush off to incorporate, remember that corporations are double-taxed. The corporation itself pays taxes on profits when the income is earned. Then you, as a shareholder, are taxed when you receive dividends. And no, the corporation does not get a deduction for distributing the dividends.

Some corporations are structured so their corporate officers are employees. That is certainly an option; however, your corporation must pay employment taxes for each employee.

S Corporation
S corporations combine the most beneficial aspects of partnerships and corporations. Like standard C corporations, these hybrid business structures usually protect shareholders from legal and financial liability.

However, in a slight deviation from C corporations, S corporations elect to pass corporate income, losses, deductions and credits through to you as a shareholder for federal tax purposes. You must then report the flow-through of income and losses on your personal tax returns and pay taxes at your standard income tax rate. Electing to form an S corporation saves you from the corporate double tax. This is a great benefit for companies that are eligible, though there are stringent rules to qualify (see the IRS website for full details.)

For taxation purposes, S corporations must file IRS Form 1120S U.S. Income Tax Return for an S Corporation to report all income, gains, losses and deductions for the company. The company may also need to make estimated payments for (a) the tax on built-in gains, (b) the excess net passive income tax and (c) the investment credit recapture tax. Additionally, like all businesses, the S corporation must pay employment taxes, including Social Security, Medicare and unemployment.

Limited Liability Company
The limited liability company is a relatively new business structure. Like a corporation, the LLC protects you as a member from any personal liability for debts and actions of the LLC. LLCs are classified as either single-member or multiple-member, and the designation has a big impact on how you report taxes.

• Single-member LLCs owned by an individual report all income and expenses on Form 1040, Schedule C, E or F.
   
• Single-member LLCs owned by a corporation report all income and expenses on the corporation's return, usually Form 1120 (or 1120S if owned by an S corporation).
   
• Multiple-member LLCs report all income and expenses on a partnership return Form 1065.

Like every business structure, LLCs are responsible for all employment-related taxes and must issue W-2s and 1099s as required. Members of the LLC are subject to self-employment taxes on all earnings or shares of the profits.

Clearly, there are distinct advantages and disadvantages to each business entity. There is no "one size fits all" solution. The perfect entity for one entrepreneur may be a disaster for another. Take the time and do the research to determine which entity will benefit your company the most and give you the best possible tax consequences.