If are on the verge of starting a business, then you will have to make a lot of crucial decisions. Among all the decisions you take in the process leading to the beginning of a business, the most crucial one connected to taxes is the type of business structure you choose for your business company. The business structure that you select has a big impact on many things like everyday operations, taxes you pay, your ability to raise money, the paperwork you need to file and also the risk on your assets. Hence the business structure for a company should be such that it provides you with the perfect balance of legal coverage and assistance.
The most general types of business structures are sole proprietorship, partnership, limited liability company (LLC), corporation and S corporation. Since every business form has diverse tax costs, it is very important to choose the structure sensibly so that it matches your business requirements. Plan Right Law are experts in guiding you to correct structure and also help in safeguarding your assets, protecting your wealth and thereby giving you the ultimate peace of mind.
Different business structures:
This is the simpler form of business structure. As the same implies, it allows an individual business owner to carry operations of their company on their own. It will need very less work while filing tax and reports with the business owner having the authority to take all the financial decisions linked to business proceedings. As the individual proprietor, you can file all your tax returns utilizing all the personal tax filing details. This type of business structure will not be a legal entity and the business name can be run with just an owner name without any legal restrictions.
But, a sole proprietor will be personally accountable for all the liabilities or arrears that businesses might experience during the process. There may also be a situation where creditors may sue the business owner if the business is liable to pay the debts. Another disadvantage is that a business owner cannot sell the shares to get the money for business purposes.
A partnership is best suited for two or multiple persons to start a business together. Two general types of partnerships are limited partnerships (LP) and limited liability partnerships (LLP). LP will include one partner with unlimited liability and all the other partners with limited liability. The partners with limited liabilities will possess restricted authority over the company. Earnings can be declared through personal tax returns. The partner without limited liability also needs to file self-employment taxes.
An LLP is similar to LP, but with a limited liability given to every partner. But the LLP will safeguard every partner from the liabilities of the partnership, as each one will not be accountable for the doings of other partners. This form of business structure would be of good advantage for multiple owner businesses who want to examine their business awareness before starting a more formal one.
A C corp or corporation is separate from the business owners and is an independent legal entity. They give robust safety against any personal liabilities. A corporation can also sell stocks to raise capital for business. Corporations also stay for a long time, even if one of the shareholders passes away, sells the shares or even becomes disabled.
But corporations need heavy documentation and reporting. This requires to fulfill more norms and tax requirements. It is a bit more complex than other business structures and a better option if you are planning to add more shareholders and expanding your business. A major downside of a corporation is that owners have to pay a double tax on the business’s incomes. Along with the corporate income tax at both federal and state levels, but also the distributed incomes to the shareholders via dividends are also required to pay taxes at individual tax rates in their income tax returns.
With an S corporation (S Corp), profit and losses are passed through to partners and comprised of their tax returns. Hence, there would be only one level of federal tax to pay. It is more engrossed to small business owners since it provides all the benefits of a corporation with tax benefits. It can have up to 100 shareholders.
But it has few downsides too. It has similar rules to that of a corporation and hence it would have higher legal and service costs. One more hindrance is that it can issue only one class of stock for raising capital for business. Ownership of the stock can only be done by individuals, estates and a few types of trusts.
Limited liability Company (LLC):
An LLC provides you with the provision of getting the benefits of both partnership and corporation type business structures. LLC will safeguard you from the liabilities of your assets like houses, vehicles and bank saving accounts. They will not be under any threat even if your business is liable to pay your debtors or facing any lawsuits.
Revenue is taxed via personal income taxes without any payment of corporate taxes. There is no restriction on the number of shareholders that an LLC can have and any member can fully participate in the business operation. This could be the best choice for high or medium risk business owners to safeguard their assets and pay a low tax rate.
While choosing a business structure, it is important to select the one that gives the best benefits and suits your business needs. It is a wise thought to review your type of business at regular intervals to ensure that you are utilizing the best one for your requirements. Once you finalize your business structure you will require a trusted associate to manage your books. Plan Right Law are the experts in the estate, business, and Medicaid planning in Sandy, Utah area, who will assist you to easily track your proceedings and make the process easier.