Business Structures and How They Are Taxed
If you’re starting a business, considering how each legal structure is taxed is imperative. Here’s a brief overview of the information you need regarding common business entities:
- Sole proprietorships: In these businesses, the owner is personally liable for lawsuits filed against their business. They do not have to file a form with the state, and taxes are reported on the individual’s personal tax return.
- Partnerships: Like a sole proprietorship, partnerships also usually require no state filings to create them, and the partners are personally liable for lawsuit damages. The IRS requires the filing of a Form 1065; the profit or loss reported on the form flows through to the partners, who report their share of the profit or loss on their personal tax returns.
- Limited Liability Companies (LLCs): Designed to be a legal structure separate from the owner(s), LLCs can help company owners separate personal and business debts. They use operating agreements to govern how they function.
- S Corporations: This business structure fully separates business and personal debts. S corporations file Form 1120S. Any taxes owed on profits get taxed at the owners’ personal tax rate. There is a limit on how many shareholders can be part of an S Corporation, and shareholders must be citizens or residents of the United States.
- C Corporations: These corporations have no limit on the number of shareholders. Personal and business debts are separated for the owners. The business entity is taxed on corporate profits and the dividends of shareholders. C corporations are required to hold meetings annually and record minutes of the proceedings.
While it is possible to gain some understanding of which entity may be right for you through personal research, speaking with an attorney is the best way to ensure that you’re making smart decisions that will hold up legally and financially.
Let’s Determine the Right Corporate Formation for You
If you are interested in starting a business, already working as an independent contractor, needing a plan to pay required business taxes (like quarterly taxes), or just unsure of where to start as a self-employed taxpayer, let me put my experience to work for you. By working together to determine your goals, we can discover the path forward that fits your needs.
Schedule a free initial consultation with me today at the Law Office of John D. Harrington PLLC in Brighton, Michigan. In addition to business tax guidance, I also help individuals resolve tax controversies and overcome tax debt through bankruptcy.