By: First Union
How Business Structure Affects How A Business is Taxed
Does my business's structure have to do with how I'm taxed? How is each business type taxed? What are my tax structure options? How do I determine which business structure is right for me? How does the IRS determine how much my business owes in taxes? How do I declare my business's structure?
Every business has a structure. A business structure is defined as a category of an organization that is legally recognized in a given jurisdiction and characterized by the legal definition of the particular category. Basically, the structure you choose for your business is important because each structure is taxed differently.
Before you do anything. You will need to get an employee identification number (EIN) from the IRS. Obtaining an EIN is free of charge and can be done from the comfort of your home here.
You will also need to remember that at each level, you will have to pay the following taxes:
- Income Tax: A tax based on a percentage of your income you must pay the IRS.
- Self-Employment Tax: A tax primarily for individuals who work for themselves and apply to (a) social security coverage (retirement, disability, and survivor benefits) and (b) Medicare (hospital insurance benefits).
A sole proprietorship is hands-down the easiest business structure because it consists of just one individual who owns and operates the business. If you plan to work solo, this is the best solution for you. Why?
- You will be taxed the same on personal and business expenses.
- There is less paperwork.
- You will have deductions such as home office, travel, mileage, startup costs, health insurance, etc.
- Remember, with a sole proprietorship, you do not have corporate protection on your personal assets.
A C corporation may be the best solution for your business structure because your businesscorporation is viewed as an individual taxpayer by the IRS. Additionally,
- Your businesscorporation is viewed as an individual taxpayer by the IRS.
- There is a good amount of paperwork.
- C corporations offer legal protection from debts and court judgments.
- You will have deductions such as contract labor, rent on business property, salaries and wages, vehicle expenses, utilities, 100% medical premiums, etc.
- The C corporation business structure minimizes your overall tax burden.
A S corporation is an interesting business structure because your business is not taxed itself, only the shareholders. With an S corporation,
- Your business is not taxed itself, only the shareholders.
- There is more paperwork than a sole proprietorship and LLC.
- S corporations provided legal protection from debts and court judgments.
- You will have deductions such as rent, depreciation, advertising, interest, employee benefits, etc.
- Additionally, expenses associated with rental income and capital losses are netted with rental income and capital gains.
Limited Liability Company (LLC)
A Limited Liability Company, often referenced as an LLC makes it so you are not viewed as a distinct separate entity. Therefore, will be taxed as such. Remember,
- You are not viewed as a distinctly separate entity and will be taxed as such.
- There is less paperwork.
- There are some legal protections for debts and court judgments.
- You will have deductions such as vehicle expenses, professional services, salaries and wages, work opportunity tax credit, client and employee entertainment, etc.
The structure you choose should deHow Your Business Structure Determines How Your Business is Taxedpend on factors such as the size of your business, your growth trajectory, and plans, as well as your annual profits. The structure you choose will determine your compliance, tax, and legal obligations. Try to make the best decision for your business's tax strategy, so you can aim to have long term goals and profits.
For more information on each business structure and the forms that need to be filed, go to IRS' business structures section.
Do You Want to Look at Your Financing Options?
If you find yourself needing to find funding for your business, First Union Lending is here to help.
We have nine different business loan types to choose from. This means that we're uniquely qualified to help you find the perfect loan to open your small business.
Applying for a business loan doesn't affect your credit. Better yet, your business loan may be approved as soon as the same day.
To discuss our business loans with one of our lending experts, click here or call 863-825-5626. We'll talk about our various business loans and help you find the right one.
Get started with the process now by learning more about our business loan types here.