If you’re about to start a business, you’ll need to decide which type of legal structure you want for your company. Although this is important for a variety of reasons, among the most notable is that your business’s legal structure will play a role in how much you’ll pay in taxes. The most common types of business entities are as follows:
A sole proprietorship is the most common type of business entity. Most freelance journalists, graphic designers, mobile dog groomers, and others, fall within this category. In a sole proprietorship, the owner has total managerial control and they’re personally liable for all the company’s financial obligations. The sole proprietor’s taxation level will depend on the company’s profits / losses.
A partnership is a business entity in which two or more people agree to jointly share the company’s profits and losses. In a partnership, the tax burden of profits is passed through to the company’s partners, and the partners report the profits on their individual tax returns. To that same effect, partners can also claim the business’s losses on their individual tax returns.
Individuals who choose to establish their business as a corporation are creating a separate legal entity under which they conduct business. Corporations are different from partnerships in that the corporation is responsibility for its financial and legal responsibilities. For example, whereas in a partnership, the partners claim the businesses profits / losses on their individual tax returns, in a corporation, the company taxed. The most common types of corporations are Subchapter corporations (S corporation) and C corporations, and it’s worth noting that corporations have more tax options available to them. It should also be noted that S corporations are taxed differently than C corporations, and, as such, if you have questions about the pros and cons of an S corporation versus a C corporation, you’ll want to speak with a CPA so they can address your questions, comments and concerns.
Limited Liability Corporation (LLC)
An LLC is a hybrid entity that has the characteristics of a partnership (or sole proprietorship) and a corporation. Although in an LLC, the owners are not personally responsible for the company’s liabilities and/or debts, LLCs do not generally pay taxes unless they have elected to be taxed as a C corporation. In an LLC, the organization’s profits and losses are passed through to its owners, who claim the profits / losses on their individual tax returns.
Have questions? Call us today to learn more
If you have questions about the pros and cons of various business entities, and you’d like to receive a more in-depth explanation of how each entity is taxed, call Hughes Snell & Co., PA today to schedule a complimentary consultation.