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What is the Tax Differences between Various Business Entities?

Posted on October 2nd, 2017

One of the more important decisions an owner will make is what structure is most beneficial at the launch of their business. Each entity operates a little differently, especially when it comes to their potential tax implications. Different business entities can expect varying obligation and regulation realities.

Sole Proprietorship and Partnership

A sole proprietorship is a business wherein there is no division between the owner and their company. When two or more individuals open and run a business together using their personal assets, their enterprise is a partnership. This entity is very similar to a sole proprietorship; the main difference is that the profits and expenses are divided equally among its partners.

Forming either a sole proprietorship or a partnership is a straightforward process, which is why many business owners choose to establish their new company as one of these entities. Additionally, because there is no division between business income and the personal assets of a proprietor or partner, these companies are not subject to double taxation. However, this lack of division also means that the owners of these enterprises risk levies against their personal property should the business owe back taxes or other debts.

LLC and S-Corporation

There are also business structures that, despite being considered distinct from their owners, avoid double taxation. These entities are referred to as pass-through, and S-corporations and limited liability companies, or LLCs, fall into this category.

An S-corporation has its corporate income taxed as personal income on its shareholders’ individual tax returns. This entity is often used as a transitional structure when a business is growing and its ownership is not yet ready to handle double taxation. On the other hand, an LLC is an entity that allows its owners to treat the business as either an S-corporation, sole proprietorship, or a partnership, thereby gaining the tax benefits of these entities without putting their personal assets at risk.

The drawback to operating as an S-corporation or an LLC is that there are usually several regulations they have to follow in order to maintain their pass-through status. These extra rules may complicate daily operations and long-term growth strategies.

C-Corp

A C-corporation is what many people think of when they think of a traditional big business. This structure is subject to double taxation: corporate profits are taxed as the income of the business, and the portion of remaining income paid out to shareholders is taxed again on their personal returns. While double taxation can make the company more expensive to run, C-corporations have more opportunities for growth than smaller business structures.

Contact Us for Formation Support

TBS Tax provides new business formation services to Burke, Springfield, Fairfax, and all surrounding communities. For more information about how we help you navigate your company’s tax realities, call our firm and schedule a consultation today.


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