Whether you’re starting a new business or are already in operation, the correct business structure will help maximize your tax situation under the current tax law.
Whether you’re starting a new business or are already in operation, the correct business structure will help maximize your tax situation under the current tax law. Each type has its own benefits and disadvantages, so you want to make sure your business is set up in your best interest. Factors such as industry, employees, level of control, limit of liability, complexity of the structure, and (last but not least) the tax implications of income earned should be considered.
This is the least complex and most common structure. One person is the owner and there is no separation between the individual and the business. The major advantage is that the owner is completely in charge and has all control over business decisions. However, there is also no protection to the individual. If there are business debts or other liabilities, the sole proprietor is on the hook to fulfill those obligations. All taxes are paid by the individual on their personal tax return.
Partnerships (General and Limited)
When two or more people look to go into business together, a partnership is a common setup. Each person’s share of profit, loss and capital stakes in the business are outlined in a Partnership Agreement prior to the start of business. In a General Partnership, each partner is liable for the debts of the company. In a Limited Partnership, the limited partners are only liable up to their contribution into the business and are usually less involved in day-to-day activities. Partnerships share many of the same qualities as sole proprietorships, but income flows through directly to each partner for tax purposes.
Limited Liability Partnership (LLP)
LLPs are a special type of general partnership. Depending on certain state laws, general partners can be protected from the debts and obligations of the company and/or the liabilities that arise from the negligence of other partners.
Limited Liability Company (LLC)
An LLC is a hybrid between a partnership and a corporation. It can be formed by one or more individuals and is setup through “Articles of Organization” with the state. Members are protected from business liabilities, and income flows through to each member for tax purposes.
S-Corps are a separate legal entity from its shareholders. There can be one or more shareholders (but less than 100), and they are personally protected from debts of the business. Income also flows to the shareholders, so there is no tax at the corporate level. Article of Incorporation must be created to incorporate the business with the state.
C-Corps are also separate legal entities from its shareholders, however income is taxed at the entity level. This can cause “double-taxation” since the entity pays tax and then the shareholders will pay tax on the dividends received. However, investors are completely protected from the entity’s obligations.
Different business structures can benefit individuals based on many factors. It is best to talk to an accountant and lawyer to determine which is best for you and your business.
Contact Us With Your Questions
If you have questions or need help with your business structure contact our professionals at The Innovative CPA Group at 203-489-0612. Or contact us online.