How choosing the right entity can save you
Written by Janet Gershen-Siegel
Business entities can seem confusing. Choose the right one from the very beginning and save on taxes and company liability.
First, here are the more common business entities.
Types of business entities
Sole Proprietorship
The SBA says a sole proprietorship is an unincorporated business owned and run by just one person. There is no difference between the owner and the business. That means you, the owner, get all of profits, but you are also responsible for all your business’s losses, debts, and liabilities.
Partnership
The SBA defines a partnership as a single business with two or more owners. Partnerships then divide into three types.
General Partnership
…show more content…
An eligible domestic corporations can avoid double taxes (once to the corporation and again to the shareholders) if they opt to be treated as S corporations.
In an S Corporation, profits and losses can pass through to your personal tax return. The business itself is not taxed. Only shareholders are taxed. However, any shareholder employees must pay themselves reasonable compensation. The shareholder has to get fair market value, or the IRS could reclassify additional corporate earnings as wages.
Limited Liability Company
A limited liability company is as a type of hybrid legal structure. It has the limited liability features of a corporation with tax efficiencies and operational flexibility enjoyed by partnerships. The owners of an LLC are called members. Depending on the state, members can be one person (one owner), two or more people, corporations, or even other LLCs.
Unlike corporate shareholders, LLCs are not taxed as a separate business entity. Instead, all profits and losses pass through the business to each member of the LLC. Then LLC members report all the profits and losses on their personal federal tax returns, just like the owners of a partnership would.
There are two great reasons why it matters which business entity you choose.
Taxes
Here are the specifics:
• Sole proprietorship – since the single owner and the sole proprietorship are the same; the owner pays taxes on the sole proprietorship’s
| In a sole proprietorship, the business and single owner are one in the same. A single owner makes all decisions with regard to the business and the single owner retains all profits earned by the business. The single owner is also responsible/liable for all debts and obligations of the business on a personal level.
Limited company is an organisation in which allow you set up and run your business. Any profits which are made within a limited company stays within the company after it has paid corporation tax, which then allows the company to share its profits.
• LIABILITY – Stockholders personal assets are not subject to claims of creditors. The corporation itself is responsible for its actions and liabilities. • INCOME TAXES – Shareholders in a corporation are subject to “double taxation” as in first the corporation is subject to corporate taxation, then money is paid out in dividends. Which then is taxed again as personal income tax. • LONGEVITY - The life of a corporation is limitless as
There are three types of business entities: sole proprietorship, partnerships, and corporations. Sole proprietorships are businesses owned by an individual person. They are easy to form, but are not taxed. Instead the individual business owner is taxed on any monies acquired on behalf of the business (Kubasek, 2012. Partnerships are businesses that are owned by more than one individual owners. The big thing about partnerships is that each partner is personally responsible for the acts of the other partners in the business . (Kubasek, 2012 Corporations are businesses owned by multiple people to include shareholders (Kubasek, 2012). They can sue and be sued and are subject to a host of rules and regulations set forth by the government.
Sole proprietorships are the most common type of business in the U.S. They are most commonly chosen because they are the easiest type of business to set up and give the sole owner of the company complete control of the company. There are many benefits to a sole proprietorship in regards to control, profit retention, and convenience.
Income taxes- All income generated through a sole proprietorship is taxed by the Internal Revenue Service. This is reported on the owner's personal tax return.
A sole proprietorship is a form of business that is owned by a single individual. • Liability – Due to the lack of legal distinction between the owner and the business, the owner is fully responsible and liable for all debts that the business incurs in the same manner that an individual is fully responsible and liable for all debts that they incur. There is no legal distinction between the assets of the owner of the sole proprietorship and the business; this means that creditors have the ability to come after the owner’s business and personal material assets. Income Taxes – Since the business is the same as the owner of the sole proprietorship, all profits or losses from the business are filed by the
INCOME TAXES- S-corp differs from C-corp taxation; taxes are passed through to the shareholders only. The company itself does not pay taxes.
A limited liability company consists of a single owner, or sometimes more than one owner, and are not taxed as separate business entities. All profits and losses pass through the business to those who own the company. Owners must report profits and losses on their personal tax return filing as a corporation, partnership, or sole proprietorship. If the LLC is ran by a single owner, they file a 1040 Schedule C form as a sole proprietor. Partners file a 1065 form consisting of a partnership, and a form 1120 is filed if the LLC is filing as a corporation. The LLC must be registered such as the State Corporation Commission, Department of Commerce and Consumer Affairs, Department of Consumer and Regulatory Affairs, or the Division of Corporations and Commercial Code. The great thing about an LLC is that the owner has freedom in management. The owner is able to run the organization as they see fit not answering to anyone,
| Any new domestic eligible entity having at least two or more members is classified as a partnership.
Determining what type of business venture to either start or invest in can be challenging. Over the next several pages we will evaluate the various types of business organizations and at the end of this report; you should have an initial or better understanding of the different types of business forms.
* Limited Liability - Unlike partnerships and sole proprietorships, corporate shareholders are not liable for any of the corporation's debts.
Limited liability company is a separate entity that separates the owner of the business. LLCs are no longer new and untested legal entity, they recognized in all fifty states and have established case law and statutes.
Waller, J. (2012). Business Formation Benefits and Risks: LLC most flexible, corporation most protective. Alaska Business Monthly, 28(6), 20.
3. Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and Social Security. The entire net income of the LLC is subject to this tax.