Deciding how to operate will take research on your part, since there are different entities of operation under the law.  How much taxes you pay will be determined by the business entity you operate under.  You have to understand your business plan and therefore know which entity best serves your business goals.  In order to legally operate your business, you must, at the very least, complete a d/b/a (doing business as) form, which you file with the County Clerk at the Court House in the county in which you live.  This allows you to operate as a Sole Proprietor or if you have a partner as a General Partnership.  You can then apply for a Federal Employer Identification Number (FEIN), and open a bank account in your business’ name.

With respect to taxes for the Sole Proprietorship or General Partnership, you simply attach a Schedule C to your 1040 Federal Tax Form and outline your income and allowable expenses, the balance can either increase or decrease your taxable income.  There is no difference between you and your company and therefore, no protection from liability.  This is why you are a d/b/a; for example, Susan Smith (your name) d/b/a Bright Stars Company (your business name).

You can also incorporate your business as a “C” corporation and file a Certificate of Incorporation with the Department of State.  A corporation is a legal entity separate and distinct from the individual(s) who compose the business. It has rights and abilities similar to those of a natural person.  Principal features are perpetual duration, limited liability and easy transferability of interests.  Your business can then carry the suffix “inc.” which shows that it is an incorporated entity.  You can also incorporate as “pc” (professional corporation) if you are in the profession of law, medicine or education (check Title VIII of the Education Law).  Before filing taxes as a “C” corporation, you can complete Form 2553 and instruct the IRS to tax you as an “S” corporation.  “S” corporations not treated differently from “C” corporations by New York State except in the way they are taxed.

With respect to taxes for the “C” corporation, this entity pays its own taxes separate from the shareholders or owners of the corporation.  Funds must be kept separate – no co-mingling.  Any money the shareholder or owners take from the corporation is always liable for income tax even after the corporation has paid its taxes; hence the term “double taxation”.  If you choose this entity, it is prudent that you pay yourself and leave the corporation’s money intact as retained earnings to be used for growing the company.

You may also want to operate as a Limited Liability Company or a Professional Service Limited Liability Company (if your business meets the requirements) and file Articles of Organization with the Department of State.  Owners are members; not shareholders.  Within 120 days of the effectiveness of these articles of organization, you have to publish a notice of formation in two newspapers designated by the County Clerk in the county in which the office of the LLC is located.

You may also want to operate as a Limited Partnership by filing a Certificate of Limited Partnership with the Secretary of State.  If you are an attorney, counselor-at-law, licensed physician or an educator under Title VIII of the Education Law, you may want to operate as a Limited Liability Partnership.

The forms for incorporating under any of the entities mentioned above (except sole proprietorship) can be downloaded from the NYS Secretary of State website, www.dos.state.ny.us.  All information with respect to forms, filing instructions, responsibilities, and fees are also available at this site.

Except for the “C” corporation, all entities (including the sole proprietorship) pay taxes through their owners.  After filing appropriate tax forms to outline income and expenses, any profits of the entities increase the taxable income of their owners and any losses reduce the taxable income of their owners.  Note that tax rates are normally higher for the “C” corporation (around 35%) than for the other entities, unless your taxable income from your income and the entity you form put you in a higher tax bracket.  You pay income taxes once per year, unless your accountant recommends you pay them quarterly.  If you have employees, you pay your payroll taxes quarterly.  If you are a retail establishment or collect taxes from your customers for services, you pay these taxes quarterly.

You should get as much information as possible to be sure you are making the best tax decisions for your business.  You should always start with a complete business plan as your guide.