Whether people are paying taxes on their personal income or business income, they want to pay the least amount of money. When you are starting a new business, one of the first things that you have to do is determine what your small business structure will be. Not every one of them will be right for you as each business structure has its own tax benefits and repercussions. Carefully considering a business structure may save you valuable tax dollars and headaches for many years to come.
A relatively easy business structure to set up would be the sole proprietorship. This structure is used when there will be only one person owning and operating a business. With a sole proprietorship, the owner only has to pay taxes on his or her own income and not the income of the company. The proprietor also has to pay his or her own Social Security and Medicare contributions, right along with the self-employment tax. Owners of this type of small business structure are fully liable for any lawsuits that are filed against the business. Any judgments could be paid out of the owner’s personal assets.
When there are two or more people owning and operating a business, that is called a partnership. There are different types of partnerships that can be utilized. Business owners can form a general partnership (GP), a limited partnership (LP), or a limited liability partnership (LLP). Each of these descriptions carries its own set of benefits and disadvantages. Whichever one you decide to use as the framework for your business, it is probably a good idea to have a partnership agreement put together for your small business structure. This way, there are no misunderstandings about what everyone is supposed to be doing.
Another business structure to choose from is the limited liability company (LLC). This structure was formed with state laws in mind and gives legal protection from business debts to its owners. Since the business’ profits are passed through to each partner, LLCs aren’t subject to double taxation like corporations. In some states, LLCs are subject to property taxes. The owners of LLCs are required to pay their own self-employment taxes. LLCs can have an unlimited amount of owners while an S Corporation is limited to the number of owners.
The small business structure that you choose for your business will affect how you conduct business and the amount of taxation the business receives. With some research, you may be able to find the one that will help your company reduce its taxes and hang on to as much of the profits as it can.