When you own a business, your company’s tax liability can make the difference between a successful year and a tough one. Fortunately, the way you legally organize your company can help you avoid unpleasant surprises when tax season rolls around. As a leading provider of financial services in Kailua-Kona, HI, Daren Katayama CPA highlights a few common business structure options and how they can impact your tax planning strategy.

The Different Types of Business Structures and How They Impact Tax Planning

Sole Proprietorship

A sole proprietorship designation is one of the easiest ways to incorporate a business. This structure combines you and the business into one taxable entity, so you can complete all your year-end tax calculations on the same form. This simplicity is ideal for independent contractors. However, sole proprietorship will make you entirely responsible for the company’s finances, including a potentially hefty self-employment tax.

Limited Liability Company (LLC)

LLCs reduce company owners’ financial liability. For example, creditors cannot come after an owner’s personal property if the business goes into foreclosure. Operating under an LLC offers flexibility. You can choose to file as a sole proprietorship, partnership, or corporation, each of which has unique advantages depending on if you take profits as income or reinvest them into the business.

C Corporations

Under a C corporation, the business and its owners are taxed separately. If you operate a small business, this distinction can help reduce your tax burden when company profits are taxed at the corporate level rather than the individual level. Although there is some risk of double taxation under this structure, C corporations can often deduct more expenses than other business formations. This approach works well for business owners who predict a challenging period of growth, as it allows losses to be carried over several years.

When you’re a small business owner in Hawaii, many different factors can determine which structure is best for you, especially when it comes to tax planning. Turn to Daren Katayama CPA for help formalizing your company. As an experienced and compassionate financial consultant and accounting firm, they will take the time to explore the specifics of your operation to determine which business structure will provide the most advantages for you. Learn more about their services online or call (808) 329-6635 to schedule a financial consultation.