NETWORK
UPFRONT
THE TROUBLE WITH BUSINESS
S-Corp, C-Corp, LLC? Making the right decision in the alphabet soup of business tax structures is critical for every small business owner. By Jean Massmann
still leaves the decision for a tax structure to go with it. Sole Proprietor
Sole proprietorships are the easiest and most inexpensive structures to setup and there are few formalities to maintain. There is no separate income tax filing required, the business activity is included within the owner’s personal income tax return. All profits from trade or business activity will be subject to self-employment tax. The largest drawback for a sole proprietor is the lack of liability protection.
S Corporation
S corporations provide a solid structure for many small businesses. S corporations have an income tax return filing requirement, however the profits or losses pass through to the owners and are included on their personal income tax returns. The self-employment tax in an S corporation is limited to the owner compensation paid through payroll, rather than applied to all profits of the business. S corporations are limited to a maximum of 100 shareholders. Partnerships, other corporations, certain kinds of
Deciding which tax structure aligns best with your unique business needs may seem complicated, but it doesn’t have to be.
L
aunching a small business is no simple feat. It’s a detailed process that requires you to make a lot of key decisions. One of the most important decisions a small business owner makes is which tax structure you want your business to fall under. Each tax structure has its own set of tax and non-tax pros and cons that must be considered along with your own goals and personal situation. Not sure which tax structure makes the most sense for your future business? Here’s a breakdown of several types of
business tax structures to help with that decision. Limited Liability Company (LLC)
LLCs have become increasingly common, particularly for startup companies. In general, it can be easier and less expensive to set up an LLC than it is to set up a corporation. An LLC can be taxed as a sole proprietor, partnership, S corporation, or even a C corporation. Making the choice to form your business as an LLC
Contributor ________ Jean Massmann, CPA, is a tax shareholder at BerganKDV, partnering with clients on their tax, accounting and consulting needs.
16
BusinessCentral Magazine.com // M AY/ J U N E 2 0 2 2
Partnership
You may consider using a partnership structure if you have two or more owners. A partnership has similar pros and cons to a sole proprietorship. There are two types of partnerships to consider: general and limited. Partnership agreements can be flexible to fit your operating needs, but this does add a layer of complexity to the tax return preparation. Partnerships have an income tax return filing requirement, however the profits or losses pass through to the owners and are included on their personal income tax returns. Partnerships are a good option for holding real property for investment or as a rental activity.
trusts, and nonresident aliens do not qualify as eligible shareholders. C Corporation
C corporations are commonly known as regular corporations. This is the only tax structure that pays its own tax, but are subject to a double system of taxation. That means that their profits are subject to income tax at a flat rate of 21 percent and they are also taxed to the shareholders if distributed as dividends. Although the taxation may seem high, many times it can be minimized when corporations put their profits back into their business to fuel future growth. Deciding which tax structure aligns best with your unique