The way your company is structured greatly impacts its taxation. For instance, a sole proprietorship is taxed the same as an individual, while a corporation (a C-Corp) is taxed on its profits and then on the dividends paid to shareholders.
In a sole proprietorship,the owner and the company are the same. It is the business owner’s responsibility to pay estimated quarterly taxes to the federal and local governments. Tax preparation for sole proprietors is relatively easy, and the tax rates are lower.
Limited partnerships are established by companies such as real estate developers, film production companies, and law firms. Advantages include liability protection up to the amount of the investment for each of the company’s limited partners. The tax implication is that the company’s profits are “passed through” to the partners to report on their personal tax returns.
Limited Liability Company (LLC)
Forming an LLC enables business owners to “wall off” personal assets from judgments against a company. An LLC does not file corporate tax returns. Owners report profit — or loss — on their personal taxes.
The C-Corporation, or “C-Corp,” is a business structure that shields personal assets of directors and stockholders from judgments against a company. A C-Corp can issue stock and has perpetual existence after a founder or owner leaves or dies. Drawbacks of this business structure are that profits are taxed when earned and then taxed again when distributed as shareholders’ dividends. This is commonly known as “double taxation.”
S-Corporations can eliminate the “double taxation” of corporate income and shareholder dividends associated with the C-Corporation tax status. Shareholders pay taxes according to their percentage of ownership of the business. If a company is a C-Corp, it must pay the corporate tax rate (around 34%). Then the remaining are distributed among three shareholders as dividends and taxed again at the federal dividend tax rate (about 15%).
The structure of your company impacts how much you will pay in taxes. Consult with an expert, such as a CPA or an attorney, to determine which is the right format for you. If you need cash at tax time to pay Uncle Sam, Biz2Credit can help.
John Schetelich A graduate of Seton Hall University with a degree in accounting, John Schetelich has been preparing income tax returns for small business owners for over 20 years.