Before you start a business, you need to consider how the type of business you choose will affect your taxes. Each one has its own benefits and some of them will affect your taxes differently. One type will even charge double taxes, but this problem can be avoided by choosing another type.
Many businesses are of this type because there is nothing you need to do to get into this category. It is not necessary to file any paperwork or register. It does mean, though, that you can be held personally liable when legal complications arise. You will have complete control over the business and any profit or loss, and deductibles are all reported on your personal tax forms on a Schedule C.
LP and LLP Partnerships
If you are looking for a simple organization between two or more partners, this is the way to go. The limited partnership (LP) has a general partner – who has the most control but also has unlimited liability, and the other partners have limited liability. A limited liability partnership (LLP) provides each partner with limited liability. Any income from this type of business is reported on your personal tax forms.
Limited Liability Company (LLC)
This type of organization protects each of the members from personal liability. Rules will vary by state, some requiring that it has a limited lifespan. For owners who want to ensure that their personal assets are protected from liability, this is a good choice. Taxes are paid by each member on their personal tax forms and they must also pay Social Security and Medicare costs. This could be a good choice if there is an increased risk involved in the business.
A C Corporation is a more complex entity than other forms and it costs more to create. It has the advantage that it is a separate entity from those who formed it. It can be taxed and held liable apart from its owners. A considerable amount of record-keeping and reports are required for its operation. When it comes to taxes, it has the disadvantage that it receives a double tax on its profits. The corporation will pay taxes on the profit, and then a second tax is charged when shares are distributed.
States may treat the S Corp designation in different ways – with some not recognizing it at all. The advantage of this business form is that it avoids the double taxing that the C Corporation faces. In order to get this status, it must be filed with the IRS. Profits, along with some losses, are passed directly to the owner's personal income.
Other types of corporations are also possible, including non-profits, and more. Combination types are also possible, giving the owners other benefits for tax purposes.
When you need tax advice on how to create your business for tax purposes, Taxfyle (https://www.taxfyle.com/) can help you. Our professional staff can help ensure that you get the best tax advantages for the type of business you want. Contact our office today and let our more than 1,600 professionals help you.