One of the considerations in establishing your business is the taxation requirements of your particular structure. Each type of entity- sole proprietorship, partnership, limited liability company (LLC) and corporation- has unique taxation procedures. Understanding your business’s future tax liability, in conjunction with other factors such as personal liability exposure, can be instrumental in choosing the structure that best suits your needs.
Sole proprietorships. A sole proprietor is directly taxed on his business income. Thus, income, gains, and losses are reported on the owner’s personal federal and state tax returns. A sole proprietor may be able to deduct many of his regular business related expenses by filing a Schedule C with the IRS.
Partnerships. You will be taxed as a partnership if you own and operate a business together with another person. The partnership is not treated as a separate entity for taxation purposes. Instead, the individual partners are taxed like sole proprietors meaning that income, gains, and losses are reported on the individual federal and state tax returns of each partner. This is also known as a “pass-through” tax entity.
Limited liability companies. Many business owners choose an LLC as their structure because members are afforded limited liability for the debts and obligations incurred by the entity. A one-member LLC reports income and expenses in the same manner as a sole proprietor. An LLC with multiple members reports income like a partnership – that is, each owner pays taxes on his share of profits on a personal income tax return. In all cases, the LLC is not treated as a distinct entity for taxes and is not obligated to file a return with the IRS.
C-corporation. Unlike other business forms, corporations are treated as separate entities for tax purposes and must pay taxes on business profits. While C corporations pay taxes on their income, they can also take applicable deductions according to IRS rules. Shareholders of a C corporation must pay individual taxes on the dividends they earn from profits generated by the corporation. Because dividends are not tax deductible, the corporation must pay taxes on them as well.
Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.