Don’t Forget Tax Issues When Selecting A Business Entity
There are a lot of considerations when starting a new business. One of the biggest considerations is taxes—that is, which kind of business entity will give you the biggest advantages when it comes to paying taxes. Of course, there is no free ride—everyone will pay their taxes somehow. But the different tax structure of different kinds of companies may help you decide what kind of entity you want your company to be.
Many people-especially smaller mechanics, handymen, or subcontractors in construction related industries—opt to be sole proprietorships. This is just you deciding to go into business for yourself, on your own. There are some advantages to sole proprietorships, but taxes aren’t one of them.
With a sole proprietorship, all the money that the business makes gets taxed including any money that’s sitting in the business’ bank accounts at the end of the year.
Yes, you do get the standard write-offs for business expenses. However, that advantage can be ruined if you commingle your personal, and business related expenses or income. That means disciplined bookkeeping and finances to separate personal and business finances are a necessity.
Unrelated to taxes, a sole proprietorship provides no corporate protection; you and the company are treated as one for the purpose of lawsuits or liabilities.
The S Corporation
A standard S Corporation is treated differently when it comes to taxes, because it gets pass through taxation. That means that the business’ income, or money that it makes that could be taxable, passes to you personally. You, and not the business, will pay those taxes. However, there is a 20% deduction, so you actually only pay taxes on 80% of the business income that’s passed on to you.
Why is pass through taxation a good thing? Because when you owe taxes on business income personally, you may be able to apply personal deductions, or your personal income may be low enough that adding the business income onto it, doesn’t increase your tax burden very much. The lowered taxes for the business also may mean more money in profits for you.
C Corporations get taxed twice. The business will pay taxes on its own, and then anybody who receives money or dividends from the company, will also have to pay individual taxes on money earned from those company profits. Dividends paid out to other shareholders or investors cannot be used to reduce the company’s taxable income.
The good news is that C Corporation taxes are capped at 21%, so this may actually work out to a lower overall tax obligation than pass through taxation.
LLCs get a bit complicated depending on what kind of LLC is chosen. LLCs can get pass through taxation, and can receive the 20% deduction that other types of companies with pass through taxation can utilize.
Call our Fort Lauderdale business lawyers at Sweeney Law P.A. at 954 440-3993 for help with your next business project or business related lawsuit.