Forms of Inspection Business Ownership and Structure

• your vision regarding the size and nature of your inspection business;
• the level of control you wish to have;
• the level of structure you are willing to deal with;
• the inspection business's vulnerability to lawsuits;
• tax implications of the different ownership structures;
• expected profit (or loss) of the business;
• whether or not you need to re-invest earnings into the business; and 
• your need to take cash out of the business for yourself.

Advantages of a Sole Proprietorship:

 

• It is the easiest and least expensive form of ownership to organize.
• Sole proprietors are in complete control and, within the dictates of the law, may make decisions as they see fit.
• Sole proprietors receive all income generated by the business to keep or re-invest.
• Profits from the business flow through directly to the owner's personal tax return.
• The business is easy to dissolve, if desired.

Disadvantages of a Sole Proprietorship:

 

• Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk.
• Owners may be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
• Owners may have a hard time attracting high-caliber employees or additional inspectors, and those who are courted are motivated by the opportunity to own a part of the business.
• Some traditional employee benefits, such as owner's medical insurance premiums, are not directly deductible from business income (and only partially deductible as an adjustment to income).

Federal Tax Forms for Sole Proprietorship:
(Note:  This is only a partial list, and some may not apply.)

 

• Form 1040: Individual Income Tax Return;
• Schedule C: Profit or Loss from Business (or Schedule C-EZ);
• Schedule SE: Self-Employment Tax;
• Form 1040-ES: Estimated Tax for Individuals;
• Form 4562: Depreciation and Amortization;
• Form 8829: Expenses for Business Use of your Home; and/or
• Employment Tax Forms. 

Advantages of a Partnership:

 

• Partnerships are relatively easy to establish; however, time should be invested in developing the partnership agreement.
• With more than one owner, the ability to raise funds may be increased.
• The profits from the business flow directly through to the partners' personal tax returns.
• Prospective inspectors may be attracted to the business if offered the incentive to become a partner.
• The business usually will benefit from partners who have complementary skills, especially when inspecting as a team.

Disadvantages of a Partnership:

 

• Partners are jointly and individually liable for the actions of the other partners.
• Profits must be shared with others.
• Since decisions are shared, disagreements can occur.
• Some employee benefits are not deductible from business income on tax returns.
• The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Types of Partnerships That Should Be Considered:

 

• General Partnership

Partners divide responsibility for management and liability, as well as the shares of profit and loss, according to their internal agreement.  Equal shares are assumed unless there is a written agreement that states differently.

• Limited Partnership and Partnership with Limited Liability

"Limited" means that most of the partners have limited liability (to the extent of their investment), as well as limited input regarding management decisions, which generally encourages investors for short-term projects or for investing in capital assets.  This form of ownership is not often used for operating retail or service businesses.  Forming a limited partnership is more complex and formal than a general partnership.

• Joint Venture

This type is similar to a general partnership, but is clearly for a limited period of time or a single project.  If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership, and will have to file as such and distribute accumulated partnership assets upon dissolution of the entity.

Federal Tax Forms for Partnerships:

(Note:  This is only a partial list, and some may not apply.) 

 

• Form 1065: Partnership Return of Income;
• Form 1065 K-1: Partner's Share of Income, Credit, Deductions;
• Form 4562: Depreciation;
• Form 1040: Individual Income Tax Return;
• Schedule E: Supplemental Income and Loss;
• Schedule SE: Self-Employment Tax;
• Form 1040-ES: Estimated Tax for Individuals; and/or
• Employment Tax Forms. 

Advantages of a Corporation:

• Shareholders have limited liability for the corporation's debts and judgments against the corporation.
• Generally, shareholders can only be held accountable for their investment in stock of the company. (Note that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
• Corporations can raise additional funds through the sale of stock.
• A corporation may deduct the cost of benefits it provides to officers and employees.
• Can elect "S" corporation status if certain requirements are met.  This election enables the company to be taxed similarly to a partnership.
• It is easier for shareholders to sell their inspection business when they want to retire.

Disadvantages of a Corporation:

 

• The process of incorporation requires more time and money than other forms of organization. 
• Corporations are monitored by federal, state and some local agencies, and may have more paperwork to fill out in order to comply with regulations. 
• Incorporating may result in higher overall taxes.  Dividends paid to shareholders are not deductible form business income; thus, this income can be taxed twice.

Federal Tax Forms for Regular or "C" Corporations:

(Note:  This is only a partial list, and some may not apply.)

 

• Form 1120 or 1120-A: Corporation Income Tax Return;
• Form 1120-W Estimated Tax for Corporation;
• Form 8109-B Deposit Coupon;
• Form 4625 Depreciation;
• Employment Tax Forms; and/or
• other forms as needed for capital gains, sale of assets, alternative minimum tax, etc.

Federal Tax Forms for Subchapter S Corporations:

(Note:  This is only a partial list, and some may not apply.) 

 

• Form 1120S: Income Tax Return for S Corporation;
• 1120S K-1: Shareholder's Share of Income, Credit, Deductions; 
• Form 4625 Depreciation;
• Employment Tax Forms;
• Form 1040: Individual Income Tax Return;
• Schedule E: Supplemental Income and Loss;
• Schedule SE: Self-Employment Tax;
• Form 1040-ES: Estimated Tax for Individuals; and/or 
• other forms as needed for capital gains, sale of assets, alternative minimum tax, etc.

Federal Tax Forms for LLC:

 

• Taxed as partnership in most cases; corporation forms must be used if there are more than two of the four corporate characteristics, as described above.