When starting a business, along with developing quality goods and services and hiring an impressive staff, you’ll also need to decide on the appropriate business structure. Business structures not only impact your personal liability but also your tax planning. Learn more about the structures in the following guide to help you decide which sounds right for your business.

What Are the Tax Implications of Different Business Structures?

1. Sole Proprietorship

Most businesses are sole proprietorships. In this case, you are your business, and there is no distinction when it comes to taxes. Accordingly, you’ll pay taxes for your business on your personal return. Sole proprietorships have a simplified filing process and are also privy to lower tax rates.

2. Partnerships

Partnerships are comprised of two or more people. As a pass-through entity, the business itself has no tax obligations. Instead, taxes pass through the business to the individual partners. All members must file a return for their share of the business, be it income or losses incurred during the year. 

3. Limited Liability Company (LLC)

LLCs fall somewhere between a partnership and a corporation. This business entity can be composed of one or more people, and members are safeguarded from personal liability in the event the business is subject to a lawsuit.

Unlike corporations, profits and losses can be declared on a member’s personal return. Because contributions to Social Security and Medicare aren’t deducted from members’ income, they’re required to submit a self-employment tax to the IRS to cover these factors. 

4. Corporations

There are two types of corporations. With C corporations, the business is its own legal entity, which means it must remit federal and state taxes. If corporate owners receive dividends as a form of income, these will also be taxed. This is known as double-taxation. 

S corporations are treated like partnerships or sole proprietorships from a tax perspective, so taxes are paid through personal returns. However, an informational return should be filed to the IRS when taxes are due. Because of the possibility of double-taxation, S corporations typically pay lower rates. 

Tax planning can be complex for a small business, so work with Tudor Wilson & Associates CPAs, LLC to ensure you make the right decisions. Since 1999, they’ve offered personalized help with business entity selection as well as bookkeeping, payroll, and other essential accounting tasks. See the full list of services they provide in Honolulu online. Call (808) 592-2000 to make an appointment.