In the US, there are four main types of business structures. Each business structure has a different tax income, which is something you should be aware of when setting up a business structure. Here’s a rundown of the four different types:
The Four Main Types of Business Structures
Sole Proprietorship - This is the most common type of business organization and it provides total managerial control to the owner.
Partnership - This is a type of business structure that involves multiple people who have an agreed to share in the profits or losses of a business.
Limited Liability - This is a hybrid form of partnership and it lets owners take advantage of the benefits of both the corporation and the partnership forms of business.
Corporation - This is a legal entity created to operate a business.
Now that you’re familiar with the basics—how do these structures affect your taxes?
Now that you’re running your business all on your own, you’re responsible for everything, including your taxes. In this structure, your business and personal taxes are not separate.
The good thing about this structure is that it’s quick and inexpensive to form, plus you get the lowest tax rates and only need to file your taxes once.
This type of business structure is a pass-through entity. What that means is that all the profits and losses of the business pass through the business and to the partners, who pay taxes on their profit share on their individual tax returns. In partnerships, all partners must file a return of income for their business. Additionally, all business partners must file taxes personally on their share of income or losses.
If you have an LLC, you don’t have to pay for separate taxes at a business level, but all of the members of the business will report their share of earnings on their tax returns. Furthermore, every LLC needs an Operating Agreement as this serves as a contract between the members of the company, and it outlines the structure of the business along with its tax structure.
Among the types of business structures, corporations are taxed differently because it has to pay its income taxes on profits. This is because a corporation is a separate legal entity from its owners; therefore, the company is taxed on all profits that are not deductible as business expenses. The taxable profit is the company’s money used to cover expenses or expansion and profits that are distributed to the owners as dividends.
Whatever your business structure is, if you have employees, you will need to pay employer taxes. Taxes can get really complicated and you might find it tempting to leave it for another day. However, it’s not advisable to let taxes stand there — you need to deal with it right away. So, before you choose a business structure, make sure that you know everything there is to know about it, specifically the taxes to avoid any mishaps in the future.
You can also work with trusted professionals such as bookkeeping or accounting for startups to help you with any tax-related concerns. Accounting for startups is crucial, which is why you need to ensure that you are with the right service. Check out New Age Global Advisory today!