TRAINING PROGRAM FOR

BOOKKEEPERS, ACCOUNTANTS & TAX PREPARERS

Learn The Revolutionary

Bedrock Business Builders System
And Claim Your Independence Now

There is an unprecedented opportunity to start a new career providing much

needed bookkeeping, accounting and taxes services to small businesses
owners, accountants and tax preparers in the USA. This 13-week program is
designed to provide an overview of the opportunity and includes:

● The Opportunity
● Legal Business Structures & Tax Returns
● Financial Reports & Accounting
● Accounting Systems
● Book & Records
● Federal, State & Local Compliance Issues
● Payroll & Independent Contractors
● Working With Clients
● Tools & Resources of The Trade
● The Bedrock Business System
 SECTIONS
CHAPTER 2 - LEGAL BUSINESS STRUCTURES & TAX RETURNS

● Doing business in the United States

● Business Tax Returns
● Personal Income Tax Returns
● Amending Returns

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PART 2 - LEGAL BUSINESS STRUCTURES & TAX RETURNS

In this chapter, we will be covering the different government agencies you may
encounter, the obstacles they create and a drill down to the birth of a business to
forming its legal structure and what tax forms need to be filed for each.

Doing business in the United States

It only takes 2 simple things to start a business in the USA or anywhere for that matter. First, the
idea that you can do something, organize something, teach something…….for a profit. The
second thing is to take action, any action. In the United States not only are you in business but
come under the direct jurisdiction of federal, State and Local laws and regulations.

○ The IRS - Mission

○ The Social Security Administration
○ Homeland Security
○ US Department of Labor
○ State & Local governments
■ The Secretary of States
■ State Departments of Labor
■ Insurance Departments
■ Divisions of Income tax
○ Other State and Local Compliance Issues
■ Registered Agents
■ Licenses & Permits

Now we can start to get into the meat and potatoes of the program starting with how we actually
do business. What this means is that there has to be some form of structure that enables an
individual to conduct business. This is our first encounter with the complexity of the US system.

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To learn about our tax system you must understand the layout of the United States. The word
“states” is extremely important here because all businesses start at the state level and there are
50 states. Every individual and every business is subject to the state they conduct business in
and then taking it one step further, the local jurisdictions they are located in. Together, the state
and local jurisdictions make up The United States. This means there are Federal, State and
Local laws that have to be followed.

MAP OF THE USA

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Legal Structures

There are several main legal structures that allow an individual to conduct business in the
United States which are:

● Sole Proprietorship
● Partnership
● LLC
● LLP
● Corporation
● S-Corporation (This is a Corporate legal entity taxed as an S-Corporation)

There are several other forms of business such as Not-For-Profit, Limited partnerships and
sometimes Estates and Trust find themselves in business from time to time but for our
purposes, we are covering the six listed above.

Sole Proprietorship

Let’s start with the simplest form of doing business which is the sole proprietorship. This form of
entity is created when an individual decides to conduct any activity with the intention of making
a profit. Some people create a sole proprietorship without even knowing it! For instance,
becoming an Uber driver, Amazon affiliate, or setting up a store on eBay are all examples of
sole proprietors that fall under the jurisdiction of Federal, state, and local laws. This is not an
issue for individuals that are aware of their status as a legal business entity but might cause
problems for millions of what I call “accidental entrepreneurs'' which will be explained later.

A sole proprietorship is combined with an individual's tax return and reported on a Schedule C
and included with the individual's Federal form 1040-personal income tax return.

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Partnership

The second form of business ownership is a partnership. This is a sole proprietorship with more
than one owner. A partnership is filed on Federal form 1065 and the profit or loss “flows through”
to the individual partner’s personal tax return. A schedule K1 is issued to the partners for them
to report the information.

LLC & LLP

An LLC and LLP are separate legal entities. LLC is a “Limited Liability Company” and is owned
by one individual while an LLP is a “Limited Liability Partnership” owned by more than one
person. An LLC and LLP provide its owners with personal legal protection from creditors but is
what the IRS calls “A disregarded entity” meaning there is no tax form associated with these
forms of doing business. An LLC is taxed the same as a sole proprietor with the income
reported on the same Federal Schedule C as a sole proprietor while an LLP is reported on
Federal form 1065 as a partnership. In other words, an LLC and LLP have no tax status. They
are allowed to elect to be taxed as a corporation if they chose.

Corporation

A corporation is a separate legal entity and can be owned by one or an unlimited amount of
individuals and other entities. A corporation can have other corporations as owners as well as
partnerships, estates, trusts, and even Not-For-Profit Entities. A corporation reports income and
expenses on Federal form 1120 and has its own level of taxation. Profits may be distributed as
dividends and taxed again at the shareholder’s level. This is where the term “Double Taxation”
originates from.

An S-Corporation is a corporation that has elected to be taxed as a “Small Business

Corporation” by filing form 2553 “Election to be treated as an S-Corporation. An S-Corp enjoys
the same limited legal liability as a regular corporation with its profit or loss flowing through to
the shareholders in the same way as a partnership. An S-Corp does not pay taxes at the
Federal level (except in some very limited circumstances). Most states follow the Federal
method of flow-through taxation and only tax profits at the individual shareholder level.

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There are limitations on who can own an S-Corp and can only be owned by up to 100
individuals. The S-Corp designation was created in 1958 as a way to bridge the gap between
sole proprietors and corporations. Before that, there was a significant gap between corporations
that were usually owned by wealthy individuals and sole proprietors that could not afford the
cost of setting up a corporation on top of the potential double taxation. It created a
“concentration of wealth” that the S-Corp was supposed to help bridge. It has not, evidenced by
the 25,000,000 sole proprietors still in existence compared to the 5,000,000 businesses that
have elected to be taxed as S-Corporation.

State Compliance

The first thing to consider when working with US based businesses is that everything actually
starts at the state and local level. The Federal Government administers and enforces the
Internal Revenue Code but that’s not where businesses start. Think about the Federal
Government as an umbrella covering all 50 states, with each state having its own set of rules
and regulations. On top of that, each state is broken down further into cities, counties and
towns, each having its own laws and regulations. Complicated? Absolutely!

Let's begin with the simplest form of doing business, the sole proprietorship. Technically, a sole
proprietorship is created any time an individual takes action on a business idea. They
automatically come under the jurisdiction of Federal, state and local laws. Working backwards
we start with local laws. Many localities require businesses to register and some do not. The
only way to find out if the business is required to be registered locally is through research.
Where the business is physically located is the place to start. Google is probably the quickest
way to find this information. You may need to contact the locality directly. Some may be so small
that their web presence may be inadequate. When I drove my Ice Cream truck in 1984 there
was a small town called Brightwaters. I started selling ice cream there and was approached by a
gentleman that informed me that I needed to register with the town and pay a $100 fee for the
right to do business there. This is where enforceability becomes an issue. Had they never
spotted me I would have never even known there was a license required.

Things are a lot more transparent now and technology makes it difficult to go unnoticed. On top
of that the fact is every government entity is trying to get as much revenue as they can and it’s
up to the business owner to do the legwork and find out. In the city of Huntington Beach

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California even an Amazon affiliate technically needs to not only register their business but
display their license in their window.

Sole proprietors are usually required to register with the county clerk which usually requires a
fee. If you see a pattern with the fees here you are correct. The government wants you to be
registered so they can monitor your activities and collect fees.

The most important thing to understand is that the burden is always on the business owner to
comply with all the laws in the jurisdiction they are physically doing business in. For home based
businesses this is where the owner lives. If they have a brick and mortar location that's the
jurisdiction and if they do business in other localities they may need to be registered there as
well.

In addition to these nuances, certain industries may need special licenses to conduct business.
For instance, on Long Island there are 2 counties, Nassau and Suffolk. To do construction work
in Suffolk requires a license and a fee. Nothing that complicated. In Nassau, you need to prove
that you worked under a licensed contractor for 5 years. This is a requirement that knocked one
of my prospects out of a potential new business. All of his contacts were in Nassau and it was
impossible for him to get licensed. Had he started and got caught he would have been shut
down and faced big fines. NYC is composed of 5 counties, each with their own regulations on
construction contractors. The food business is similarly complicated on top of having to meet
state regulations.

As you can see, doing business in the United States is not all about the IRS and we are still only
talking about sole proprietors! The last item I’d like to mention here is the name. When a sole
proprietor launches a business their name is the business. The business and the individual are
combined, legally and in name. If a sole proprietor wants to conduct business under a name that
is not their own they must register for what is called a DBA or Doing Business As. This is filed at
the county level.

Now let’s move on to the other types of business entities. All the other legal structures are
formed at the state level, specifically with the Secretary of State. There are 50 Secretary of
State offices and we have included links to each one in our resources section. Each state has its

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own set of rules and procedures when it comes to forming a business. They all require a fee to
get established and most have other filing requirements in addition to the initial registration.

It’s important to note that a business must be registered in the state the owner lives in. In the
USA there are 5 states that have no income tax and are attractive to uninformed business
owners to form their entities there. Large companies that have sophisticated structures with
shareholders and physical locations spread out over several states may opt to incorporate in a
business friendly state in case there is a shareholder dispute or for other legal reasons. This is a
big mistake many single owner entities make and wind up paying for later. The state they live in
always has jurisdiction. Nothing can stop them from registering in a tax free state but they will
also have to register in their home state, thus accomplishing nothing except having to file and
pay fees every year to 2 states instead of one.

PC and PLLC for Licensed Professionals

Some professions require a license to practice such as doctors, lawyers, therapists, etc. In
those cases, the state may require a special type of corporation or LLC be formed further
identifying the owner as a licensed professional. This requirement depends on the state the
professional is licensed in and requires an additional level of registration, usually through the
professionals governing body.

These entities are called a PC (Professional Corporation) or PLLC (Professional Limited Liability
Company). A PC can elect to be taxed as an S-Corp by filing form 2553 and may need a
separate S-Corp election with their state. Most states automatically allow S-Corporation status
as long as there is an IRS acceptance while some, such as NYS require an election to be made
at the state level as well. A PLLC is considered a “disregarded entity” for tax purposes but can
also elect to be taxed as a corporation by filing IRS form 8832 and then elect S-Corporation
status with form 2553. See “Legal Structures” above.

Here is a link to determine what professions require a special license in each state.
State License Requirements
License Requirements by Profession

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Business Names

A lot of confusion arises from what names can be used and how. A sole proprietor uses their
own name by default. A “DBA” is for a sole proprietor that wants to use a business name other
than their own personal name. The name must be registered with the local county clerk where
the business is physically located, usually the owner's home. Partnerships need to obtain a
separate tax ID# with the IRS and register their business at the county clerk where they are
doing business.

Foreign Entities

Every business must be registered in the state they are physically located. If they start doing
business in other states and have “Nexus” they must register and obtain approval from the
secretary of state they have nexus in to do business in that state as a foreign entity. Nexus can
be a complicated issue and every state has their own definition of what constitutes nexus so you
must be careful here. Nexus has been argued by states before I started in accounting and
mostly has to do with collecting sales tax. We will cover sales tax in a later chapter. In simple
terms, nexus is achieved when there is a physical presence in the foreign state. Having an office
and or employees in that state is an automatic nexus. Having nexus in a state requires the
business to register, not only to do business and file tax returns but also to register with the
state department of labor, state income and state sales tax departments.

You can see that having a nexus is not good from an administrative standpoint and businesses
try to avoid it if they can. States have been clamping down more and more on foreign entities
because they lose the revenue those businesses would be paying if they were registered
properly. Specifically, the states want their share of unemployment insurance attributed to
wages paid in the state and their share of sales taxes.

Sales tax is a significant sore spot for states because unless a business has a nexus they are
not required to collect and remit sales taxes to that state. States have continuously challenged
the definition of nexus all the way to the Supreme Court of the United States. Recent rulings
have required online businesses such as Amazon to be registered in every state they deliver to.

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People used to buy on advertising to escape the sales tax. In order to protect your clients you
will need to research the states they are delivering to because it’s not as easy as having an
office and/or employees in the state. In 2019 Arizona started claiming a business has nexus if
their sales are $200,000 or more. For more information follow this article on Wayfair, an online
store that delivers everywhere.

THE WAYFAIR SALES TAX CASE

Opening a Bank Account

Sole proprietors can use any account in their name and simply designate it as business. To
open a formal business account the sole proprietor will need to register the business with the
county clerk where the business is physically located. This requirement is very hard to enforce
so millions of businesses go unregistered with little or no consequences. In order to open a
business bank account they have no choice because the bank usually requires the certificate to
open the account. There are a lot of online banks popping up that are more concerned about
making sure the individual opening the account is legit. They ask for picture ID, social security
numbers and possibly a utility bill or lease in the business name. If the business is a
Partnership, LLC, LLP or corporation (including S-Corp) a copy of the Federal Tax ID# and the
county clerk registration for a partnership, Articles of Organization for an LLC or LLP and
Certificate of Incorporation for a Corporation. Banks, guardian against fraud have also started
asking for the Operating Agreement for an LLC and LLP and shareholders agreement for corps
that designate the individual as having the authority to open the bank account.

Registered Agents

Every entity needs to designate an individual or company that will accept any legal process
served to the business. The owner of the business or anyone else they designate can be the
registered agent as long as they are physically located in the state of formation. There are
companies that charge a fee for this but there is no need to pay the fee when the owner (or
anyone else they designate) can be the registered agent.

A registered agent can also serve as an important conduit of information. If an owner is not
physically located in the state they are registered in, the agent can receive mail from

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government agencies and transmit to the owner. This is an important function because there is
a lot of correspondence and sometimes no response can result in a multitude of issues.

Licenses & Permits

In addition to tax filings and registrations business owners may need to apply for additional
licenses and/or permits. This can go as far down as the local government level. For instance,
Huntington Beach California requires a business license no matter what the business is or what
legal structure has been established. Nassau county NY has strict guidelines for obtaining a
contractors license including 5 years of working experience while Suffolk county requires only a
$100 filing fee. When I drove my ice cream truck before graduating college in the township of
Brightwaters NY I needed a permit that cost me $100.

When an entrepreneur establishes any type of business with any type of legal structure careful
research needs to be conducted to ensure compliance with all local, state and federal laws.

Federal Tax ID#

Once an entity is formed it is required to obtain a Federal tax ID#. Sole Proprietors use their
own social security number and are not required to have a separate tax ID unless they use a
DBA or hire employees. The way to get a Federal Tax ID# is on the IRS website www.irs.gov or
by fax or mail using form SS-4.

FORM SS4 - INSTRUCTIONS

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Business Tax Returns

As mentioned above, each type of entity has its own IRS form with the exception of an LLC or
LLP which are not recognized (disregarded entities) for tax purposes. Here are the specific
forms:
Sole Proprietorship - Form 1040 Schedule C Instructions

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Partnership - Form 1065 Instructions

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Corporation - Form 1120 Instructions

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S-Corporation - IRS Form 1120S Instructions

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Not For Profit - IRS Form 990 Instructions

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Personal Tax Returns - Form 1040 Instructions

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State & Local Tax Returns

As stated previously, everything starts at the state and local level and each has its own set of
rules and regulations. Most use the Federal tax code as a starting point and then make changes
based on the needs and wants of the individuals in that jurisdiction. At least that's the way it’s
supposed to be.

Amending Returns

Returns may be amended for a variety of reasons. Mistakes, new information, credits or
deductions that were overlooked are the most common reasons. There is a statute of limitations
of 3 years from the due date or 2 years from when taxes are paid, whichever is later. Personal
returns are amended using form 1040X. Corporations have form 1120X while S-Corps and
partnerships amend returns checking a box that says “Amended”. State and local returns will
have their own version on the amended form.

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 Business Entity Chart
Type Tax Form # of owners LegalLiability

Sole Proprietor Form 1040 schedule C One Unlimited

Partnership 1065 At least two Unlimited

Corporation 1120 Unlimited Limited

S Corporation 1120S Up to 100 Limited

LLC Form 1040 schedule C or if 1 Unlimited Limited

member or 1065 with more
than 1 member (unless an
election is made with IRS)

LLP 1065 At least two Limited

Not-For-Profit 990 None Limited

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