There are nine different business designations to choose from when forming your company. Your corporate entity impacts your company's ability to earn and grow, determines liability, and affects your business taxes.
Why Your Business Structure Matters
When starting a new business or reassessing your current one, the corporate structure you choose has a significant impact on various aspects of your company, including taxes. There are nine different business designations to choose from when forming your company. Your corporate entity impacts your company's ability to earn and grow, determines liability, and affects your business taxes. Let's examine the tax implications of some of the most common corporate structures.
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Corporations
Most corporations fall under the designation of a C-corp, or non-profit. Corporations are viewed as separate tax-paying entities, meaning the business itself is taxed on its profits, and shareholders are taxed on their dividends. Non-profits can register for tax-exempt status with the IRS, but they must follow strict requirements to maintain that status.
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Sole Proprietorships
Sole proprietorships are pass-through entities, meaning the company's profits and losses are reported on your personal income tax return using a Schedule C. This simplicity makes them a popular choice for first-time business owners.
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Partnerships
Limited partnerships (LPs) and limited liability partnerships (LLPs) are also taxed on a pass-through basis. Each partner receives a Schedule K-1 to report their portion of profits and losses, which are subject to income tax and self-employment tax.
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Limited Liability Companies
Limited liability companies (LLCs) operate on a pass-through basis for tax purposes, with single-member LLCs taxed like sole proprietorships and multiple-member LLCs distributing profits and losses to all partners.
Why Consult with an Accountant?
Your business's corporate structure directly affects your tax obligations. Choosing the wrong structure could result in higher taxes than necessary. As your business grows, it may be beneficial to reevaluate your current corporate structure to determine if a change could save you money on taxes.
At Peter Witts CPA PC, we're here to help you navigate the complexities of choosing the right corporate structure and ensuring your business remains tax-efficient. If you have any questions or concerns, please don't hesitate to reach out to us.
I’m Kristin, the PWCPA PC Customer Success Specialist. For more information about this topic, or any other, you can always reach me through our customer ticketing system.