Starting your own business involves many important decisions, some of which will impact how you go about financial and tax reporting. You want to choose the entity structure that offers you the most tax advantages, calling on the need to understand the different entity types, the tax advantages of each, and how to choose the right one.
What are the Different Entity Structures?
There are four main entity structures: Sole Proprietorship, Partnership, Limited Liability Company, and C-Corporation/S-Corporation. A Sole Proprietorship sometimes referred to as a Single-Member LLC, can only have one owner that reports all profit and loss. If you want to bring on a partner (there are options for married couples), this structure is not for you. In addition, a Sole Proprietorship is the easiest business structure to set up and retains a low cost to maintain. Moreover, a C-Corporation is more complex in the setup and retains the ability to offer shares in an initial public offering. C-Corporations have complex financial and tax reporting requirements because of the structure, making it not ideal for small businesses.
What are the Tax Advantages of Each?
Each entity structure has different tax advantages. Since a Sole Proprietorship only has one owner, all income or loss is reported on the individual tax return with corresponding self-employment and ordinary income taxes paid. On the other hand, a Partnership, Limited Liability Company, S-Corporation, and C-Corporation need to file a separate business return because other partners/shareholders are involved. In these business structures, expanded tax deductions and credits are available. Additionally, more tax planning strategies can be implemented.
How Can I Choose the Best One for My Needs?
Understanding your business needs will be critical to choosing the right structure. Many small businesses lean towards a Sole Proprietorship and Limited Liability Company setup when first starting out because of the simplicity. However, a Partnership or Corporation can offer added liability protection and give your business access to critical tax planning items. Whatever structure you decide on, you will need an accounting expert working alongside you to properly keep track of accounting and tax-related items. Reach out today to learn more.