Choosing the Right Business Structure For Tax Purposes

Selecting an ideal business structure is one of the key decisions for any new enterprise, influencing everything from personal liability to paperwork and licensing requirements.

Your choice can also have an effect on how and if your company pays taxes and can raise capital. This blog will help you explore all available options to you.

Limited Liability Company (LLC)

An LLC provides business owners with added advantages over sole proprietorship or general partnership businesses, such as protecting personal assets in case of legal claims against your business.

An LLC (limited liability company) is a type of legal structure recognized by the federal government as its own distinct entity, offering more freedom in how your business is taxed as members can select whether to have the IRS treat them as sole proprietorship (if it only has one owner), partnership (if there are more than one member), or corporate ( S or C ).

Structure can have a dramatic impact on all aspects of running your business, from tax payments and paperwork management to overall costs and administrative burden. Carefully consider all available structures before consulting with an attorney or accountant for personalized advice. Below is a chart listing popular structures with their associated taxation options.

Corporation

Corporations operate as separate legal entities owned and managed by shareholders, overseen by directors. Corporations are typically seen as more formal business structures and can be particularly helpful to entrepreneurs looking to raise capital through investors before potentially going public in the future. When choosing this structure it is essential that legal risks and tax implications are carefully considered before proceeding – it would be prudent to consult an attorney and financial, tax or business advisor prior to making this decision.

Selecting an effective business structure is a significant decision with lasting effects for your company. It will determine how your company is taxed at both state and federal levels, how you raise money and whether or not personal liability protection exists. Furthermore, selecting the appropriate structure may alter how you manage and organize your team as well as determine how taxes work within each structure – especially for newly launched small business owners.

Partnership

Designing your website, making the first big order and negotiating with suppliers are all exciting aspects of starting a business, but selecting an appropriate legal structure may add additional layers of complexity you hadn’t considered.

Tummon notes that your choice of business structure will have an impactful and far-reaching influence over how you record transactions and categorize revenue, as well as your personal liability exposure.

General partnerships are business structures composed of two or more owners who share management and profits in equal portions, all being personally liable for all debts and obligations of the partnership, whether shared equally or unequally among partners. Another form of partnership, limited liability partnerships (LLPs), provide some level of protection from personal responsibility for partner negligence.

Consider your company’s long-term needs when selecting its structure. Consider whether you require the option to alter it later, as well as any extra responsibilities such as recording detailed financial data and reporting to government authorities.

Sole Proprietorship

A sole proprietorship is one of the easiest business structures to establish and run, as it requires few formal documents and no registrations beyond any industry license requirements. Furthermore, its administration costs tend to be less than more formally structured businesses.

Personal liability can be an issue when operating as a sole proprietorship; should the business be sued, its assets could become exposed. Furthermore, lack of separation between personal and business income can create tax complications; for example, IRS treats profit earned in such an arrangement as part of your personal income.

If you are considering becoming a sole proprietorship, consult with your local Small Business Development Center or an experienced tax professional before beginning. It is also a good idea to remain current on any federal, state, and local filing requirements (for more details see our guide Filing Payroll Taxes) including payroll taxes (check our guide Filing Payroll Taxes ). Don’t forget quarterly estimated tax payments!