tax attorney

Tax Considerations When Selecting Your Business Structure

Choosing your business’s structures is one of the most important decisions you will make when you are starting out. The legal form in which your business will operate, your business structure will have significant implications for how you are able to run your business, generate capital, grow, and in regards to your personal liability exposure. Furthermore, your business structure selection will dictate important tax impacts. Here, we will discuss some of the tax considerations you should include in assessing your business structure options.

Tax Considerations When Selecting Your Business Structure

Plain and simple, different business structures are taxed in different ways. For instance, with a sole proprietorship, the IRS essentially sees no difference between you and your business. The business is not a taxable entity because there is really no differentiating between you and your business. All of the assets and liabilities, as well as the business income, are treated as belonging to the owner. Because of this, the owner of a sole proprietorship will be liable for paying self-employment tax. This is the social security and Medicare tax that an employer is responsible for paying. Self-employment tax will be paid through estimated taxes throughout the year.

With a partnership, which is when two or more people share ownership of a business and its profits and losses, partners are required to file a separate return for the business income as well as filing personal taxes on their share of the business income and losses. A limited liability company (LLC), on the other hand, is considered to be a separate legal entity from the owners. A kind of hybrid business structure between a corporation and a partnership, owners in an LLC are considered to be members of the LLC. Profits and losses sustained by the LLC are passed through to members. No tax on income generated by the LLC is paid at the business level. Instead, income and losses are passed through the LLC onto the personal tax returns of the members, and any tax bill is paid at the personal level.

With a C corporation, the corporation acts as a shield for owners, protecting them from personal liability. It is a separate entity and is taxed accordingly. Corporations must pay taxes at the federal level and state level, and sometimes even at the local level. Because C corporation profit is subject to taxation and that same income is taxed again when dividends are distributed to shareholders, there is sometimes double taxation. With an S corporation, on the other hand, double taxation is avoided as all the corporation’s profits and losses are passed through to personal tax returns of the owners. Shareholders carry the sole burden of tax implications when dividends are distributed. What remains of the corporate income which is paid to the owners as a distribution is taxed at a lower rate.

San Francisco Tax Attorneys

Do you have questions about how your business taxes? Talk to the knowledgeable team at Regal Tax & Law Group, P.C. Contact us today.