No one is exempt from paying their taxes, and that includes businesses most of all. Of course, there are a few variables that affect the type of taxes that you have to pay.
Before you register your business, you need to decide what legal structure is best for you and your company, and thus what taxes you will pay alongside it. The fives options include C corporation or S corporation, partnership, sole proprietorship, and limited liability company (LLC). Each one has their own list of advantages and disadvantages when it comes to the everyday finances and operations.
Still, every single business has an obligation to file their taxes, and if they make a point of keeping everything organized and acquire the assistance of a financial expert, they can also learn how to get the most amount of money from tax returns. After all, purchases such as equipment loans and interest rates on business loans are two factors that can be noted as part of the tax deductions.
This article will provide you with a better understanding of what the different structures mean and can thus help you decide how you should organize your small business.
Choosing a structure
As you embark on a journey of entrepreneurship, there will be many questions and even worries that cloud your mind. How will you find the best possible employees? Will the daily operations be efficient? Who will manage the cash flow?
Still, you must take some time to make a strategic decision. In this case, what business structures suit your company needs best?
The C corporation set up is something that you have seen everywhere, although it is especially useful for larger organizations. Firstly, there is a 21% tax rate applied on profits, and this is on the business level. However, this type of legal structure is subject to double taxation, both at the personal and corporate level.
The business is seen as a completely separate entity from the individual, and it is for this reason that if it were to be sued, it would limit the liability on the individual level. Imagine your company incurred a large amount of debt as a result of the interest rates for business loans. The owner would not be held personally liable for this.
Moreover, when it comes to shareholders of the company, it can have as many as you want, something that not every structure can account for.
It is beneficial if you plan on taking big investments, and overall, the large businesses will find this legal structure most useful.
There is yet another kind of corporate structure, and it is known as the S corporation. Despite the corporate element, they do not have to pay the corporate federal taxes that a C corporation must submit.
In fact, this is known as a small business corporation, and it is beneficial for smaller organizations given that it allows a pass-through taxation. In other words, tax information will be passed through shareholders who account for this information on personal income tax submissions. No longer are you subject to the double taxation that a C corporation goes through. However, you also don’t have the option to have an unlimited number of shareholders.
A partnership is just as the name implies, given that there are several individuals who oversee the company operations. In this case, it’s important to note that the company taxes, both the gains and losses, are filed on the owner’s personal income tax returns.
The IRS defines it as follows:
A partnership is a relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business (source).
A small business can opt for a partnership, although it’s important to ensure that the leaders all have a similar vision for where they see the company going in the future.
On the other side of a partnership is the sole proprietorship, where there is a single owner who controls the entire profit-making ventures of the business. This can be both good and bad, depending on the state of your company’s finances. If you were to be sued and enter large amounts of debt, you would be personally liable, completely different to the case of a C corporation.
When it comes to taxation, the company is not seen as a separate entity, and the funds are accountable under the individual proprietor of the business. You are solely responsible for overseeing the business operations, which can also create a lot of pressure for some people.
Limited liability company (LLC)
Unlike any other structure, a limited liability company (LLC), can choose how they want to be taxed, whether they want to be seen as a sole proprietor, partnership, S corporation or C corporation.
There is no other structure that offers as much flexibility as an LLC, both in terms of taxes and management.
Of course, if you have only one owner of the business, then you will be taxed as the sole proprietor.
Organize your files and submit your taxes
Once everything has been said and done, and you clearly outline the structure that will impact the company operations, you must realize that organization is key when tax season rolls around. The deadline for the 2018 year is on April 15, 2019, and you must start consulting your accountant or another financial advisor sooner rather than later for filing business and personal taxes alike.
The goal of any organization is to make a profit, and if you remember to account for tax deductibles, such as a commercial loan you took out, you have a bigger chance of receiving more money back.
In summary, while there is an overarching need to pay taxes, the tax rates and procedures are all heavily dependent on your structure. Depending on what you want to achieve with your company, and what you feel will offer you the most profit is how you should decide on the legal structure. How much control and responsibility do you want to have over your business, as a leader? Your tax rate, and even the deductions you can account for, such as commercial loans, are impacted by your legal structure. Remember to consider these types of questions, before you register your business.