Are you a new business? Perhaps you’re considering moving from the freelance world to something more legitimate. Perhaps you’ve just taken over a family business and want to know what to do next.
Whatever your case, knowing the ins and outs of business structures can help you kickstart a successful and profitable business.
In this article, we cover the various types of business structures you can use when starting up your company. We’ll also touch on their tax implications and help you decide which is right for you.
Keep reading to learn more.
Sole Proprietorships
A business concept that is also known as a sole trader, or a one-person business is a type of business entity that is owned and run by only one person and in which there is no legal distinction between the owner and the business.
It is not a separate legal entity from its owner and, therefore, is not subject to federal or state corporate income taxes. Instead, the sole proprietor reports business income or loss on his or her personal income tax return.
Self-employment taxes, which include social security and Medicare taxes, may also apply.
Partnerships
This structure happens when two or more people come together to form a business. Each partner contributes money, property, labor, or skills to the company, and in return, each partner receives a share of the business’s profits and losses.
It can be either general or limited. In a general partnership, each partner is equally liable for the debts and obligations of the business. In a limited partnership, there is at least one partner who is not liable for the debts and obligations of the company.
Limited partnerships are more common in business ventures where there is a large amount of capital at risk.
LLCs
A legal entity that can shield its owners from personal liability. An LLC also has the option to have a tax as a corporation. The primary benefit of a limited liability company is that it protects the owner’s personal assets from creditors and lawsuits.
The business owner’s personal assets are not at risk if the business is sued or incurs debt. It is also taxed as a pass-through entity, which means that the business’s income is taxed at the owner’s personal tax rate.
Nav business formation can help you start an LLC to expand your alternatives for company finance, provide advantageous tax deductions, and safeguards your home and savings in the case of financial or legal business problems.
Corporations
This is created by a state and is separate from its owners. This separation gives the owners restricting accountability, which means they are not personally responsible for the debts and liabilities of the corporation.
The most common tax implications of a corporation are the corporate income tax and the shareholder income tax. The corporate income tax is a tax on the profits of the corporation.
While the shareholder income tax is a tax on the dividends that the shareholders receive from the corporation.
Analyzing Various Types of Business Structures
Therefore, like any other decision in business, choosing the right business structure has tax implications. The most common types of business structures are sole proprietorships, partnerships, limited liability companies (LLCs), and corporations.
Each has its own tax consequences, so it’s important to choose the right one for your business. The best way to do this is to consult with a tax professional who can help you understand the implications of each business structure.
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