Owning and starting your own business from the ground up can provide its fair share of challenges. In addition, it can be intimidating when searching for a mortgage as an entrepreneur. Aside from the standard personal financial documentation needed to qualify for a loan, you need to provide a papertrail of your business finances to prove legitimacy so a mortgage lender can make financing options available to you.
One of the decisions you need to make early on is what type of business entity you want to establish. This will determine which type of income tax return you file, and how the IRS will examine you moving forward.
Essentially, “entrepreneur” is a fancy way of saying “self-employed”. As an entrepreneur, there are different ways to structure your business or ways of claiming income for tax purposes. In order to find the best course of action when applying for a mortgage loan, it’s best to know exactly what type of business structure you have:
The Different Types of Business Structures:
– Files taxes on Schedule C of personal tax return
– A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation
– Files taxes on IRS Form 1065
– A partnership is the relationship between two or more people to do trade or business. Each person contributes money, property, labor or skill, and shares in the profits and losses of the business
– Files taxes on IRS Form 1120 (Owners are generally W-2, No K-1’s for owners)
– In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation can also take special deductions, conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders
– Files taxes on IRS Form 1120s (Owners receive K-1. Many get W-2 but not all)
– S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. They are responsible for tax on certain built-in gains and passive income at the entity level
Limited Liability Companies (LLC)
– Depending on the LLC, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information
Overall, financial literacy and organization are extremely important when understanding your assets and applying for a mortgage loan. Knowing exactly what you earn and how to display that adequately to your lender will take much of the burden off of your financial endeavors. Of course, if you have any questions regarding tax forms and proper paperwork for your specific situation, please contact us at (760) 930-0569 and one of our loan officers will assist you. We are well-versed in working with self-employed clients, and are happy to address any apprehensions you may have in order to make your loan process as smooth as possible.