Choosing The Best Business Structure For Taxes
When starting a business, one of the first decisions you must make is choosing how to organize your company. This is a vital step that affect how much personal liability you face, what you will owe in taxes and the amount of paperwork and record-keeping you will contend with. So what are your options?
Sole Proprietorship: This type of organization typically involves one person who owns and operates the business. It is also the most common type of business structure as it’s simple and inexpensive to form, and it allows the owner to have total control of the business. There is also no state filing required, which means less paperwork for the owner. The tax aspects are particularly desirable, as the income and expenses from the business are included on your personal income tax return.
However, the ease of a sole proprietorship comes with some significant disadvantages. For one, a sole proprietor is personally liable for the company’s liabilities. This means that any debt or legal claim filed against your business could place your personal assets at risk. Second, banks are often wary to provide loans to sole proprietorships, meaning that you’ll likely need to rely on your own financing.
Business Tax Structure Considerations
Corporation: A corporation is essentially a legal entity that protects its owners’ assets from the liabilities of the business. The corporation is taxed separately from the owners and is held legally liable its actions. There are two variations:
• C Corporations: Incorporating a business automatically classifies it as a “C” corporation. In a C corporation, if the business’ profits are distributed to the owners as dividends, the owners will then have to pay personal income taxes on those dividends. This is referred to as “double taxation,” since the profits are taxed at both the corporate and personal level.
• S Corporations: After you have incorporated or business, you can change it into an “S” corporation by filing a form with the state and IRS. In an S corporation, profits and losses are “passed through” the business to the owners. These profits and losses (as well as other taxable items) are then taxed on the owners’ personal income tax returns. Essentially, this means that the corporation itself pays no taxes, which is why it is a popular option.
The main disadvantages to creating a corporation are the costs, as well as having to conform to extensive record-keeping requirements.
Limited Liability Company (LLC): A hybrid option, the LLC provides the advantages of both partnerships and corporations. As with an S corporation, the profits of the business are “passed through” to the owners. The owners are also protected from the liabilities of the company. For these reasons, LLCs are becoming increasingly popular.
Before you decide how to set up your business, you need to evaluate your options and goals. Jeff B. Cohen has years of experience and will analyze your situation and empower you to make the best decision for your business. Call Cohen & Gardner at 310-285-7373, or send us an email at firstname.lastname@example.org for a free consultation.