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Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.

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Featured Biz Question

I would like to open a teen resale shop offering name brands, such as Tommy. My sister and I are in the process of setting up our retail store. We became an S corp a few months ago -- as we were told this is the best way to go. I'm a little confused tho, on what we'll have to pay the state, what taxes are. There is so much talk about double-taxation savings, I don't really get it. When I went out to the IRS site, there are 30 different S corp forms. Which ones really pertain to us?? Also, we were told by our accountant that we don't need a fictitious name-however, at least 10 people have told us we DO. Why? and how do we go about this??? Thanks!

Michelle, The Teaching Store, Inc.

Answer from our Guest Expert Peter Hupalo of Hupalo Ltd.

S Corporation Taxes

First, congratulations on starting your new store! I wish you happiness and financial success! I've got a long answer for you, but I felt like I needed to get some of the basic business structure and tax scenarios out on the table before diving into the S corporation, double taxation, and fictitious name details. I think this beefy background might help you better understand your newly acquired S corp situation. So let's begin with sole proprietorships and work our way to S corporations.

A Quick Review of Sole Proprietorship Taxes

You've already gotten beyond the sole prop stage, but for those who haven't yet traveled that far, let's do a quick review of doing business as a sole proprietorship. Often, people start a business, and when tax time comes around, they learn they're "sole proprietors" by default. As such, you file Schedule C (or the easy version C-EZ) with your Form1040, Individual Income Tax Return to report your earnings (or losses) from operating a business. (IRS Publication 334 helps sole proprietors learn about taxes). Schedule C is just like any other attaching schedule to the1040. In the end, all of your hard work is summarized by one line on your 1040 tax return showing your net profit or loss from running a business, which is then taxed to you as ordinary income.

If your earnings are above $400, you also need to file Schedule SE (SE stands for self-employment). This is the point at which many new entrepreneurs get a queasy feeling and start thinking, "Hey, this sort of sucks. I'm going to be paying other taxes than just income tax on my earnings." As a business owner, you will learn about many, many taxes of which the average employee has little knowledge. Your self-employment tax is the equivalent of employee Social Security and Medicare Benefits tax, better known to employees as FICA (Federal Insurance Contributions Act).

The disadvantage of being a sole proprietor is that you and your business are considered the same legal entity. If someone falls in your retail store, for example, and wins a big judgment against your retail company, structured as a sole proprietorship, that judgment is also against you as an individual. All of your personal assets are at risk. To get liability protection, many savvy entrepreneurs incorporate their business. continued

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About the Expert

Peter Hupalo
Owner of HCM Publishing, Inc.
Peter investigates the latest computer-programming technologies and researches companies for investment. He also writes a column about entrepreneurship and small business for iSyndicate.com and reviews biz books. Peter wrote Thinking Like An Entrepreneur, about how to make savvy business decisions and take real control of your financial destiny. more