LLC, Corporation, or Sole Proprietorship…3 Simple Tips to Choose a Business Structure
#accounting solutions #business structure # business entities #taxes and llc #Kingdombusinessowner
A business structure determines the type of tax return filed by the owners, the business operation standards and procedures, financial reporting procedures, the eligible business expenses and tax deductions. Choosing a business structure should be based on your personal tax situation and the separation of personal liability from business liability.
The most common business structures or entities:
* Sole Proprietor Ship – a single owner
* Partnership – 2 or more owners.
* Limited Liability Company
* Limited Liability Partnership (LLP) –
* Limited Service
A sole proprietorship and partnership status will not separate your personal liability from your business liability. If a client/customer sues the owner the owner’s personal property is liable as well as the business property. Sole proprietors and partnerships are solely responsible for business taxes and must report on the personal tax return.
Limited Liability Companies and Corporations provide the owner’s personal property protection. However, in an LLC, each owner (individual or partners) are responsible for their portion of the taxes. If a client/customer sues the owner(s) of a LLC or Corporation the owner(s) personal property is protected. The courts would only consider business property.
Here’s a tax example:
An LLC has a net profit of $200,000. The $200,000 will flow to the owner’s personal tax return creating taxable personal income. The owner(s) of non-corporations can use personal deductions to reduce the personal income tax liability, if you did not file and pay quarterly taxes. Remember, you cannot use business expenses because business expenses were used to calculate the net income. The owner would submit a K-1 with taxes. The corporation files 2 separate returns; 1 tax return for the business, 1120 or 1120s, and 1 tax return, 1040, for the owners. The owners receive pay as payroll and will receive a W-2 at year end. The owners would report the income on 1040 as W-2 wages because the owner is considered an employee of his/her business.
The Top Benefits of a Corporation and LLC
Two top benefits for operating as a Corporation are (1) additional business tax deductions to calculate net income and (2) separation of personal and business liability.
Three top benefits of a LLC are the (1) personal liability protection, (2) no business income taxes, and (3) the option to operate as a corporation.
The LLC electing to operate as a Corporation is allowed to deduct owner salary and tax payments as business expenses which lower taxable business income. A non-corporation cannot deduct owner salaries payments and/or withdraws as a business expense.
How to choose your business structure
1. Speak with a professional for Tax Planning
2. Determine how the income will affect your personal tax return (tax liability increases with higher income and lower deductions)
3. Think about personal liability
Tax planning will help to select a business structure. Speak with a tax professional before choosing a business structure. Speak with a tax professional for tax planning to make sure you are receiving your maximum deductions under your business structure, if you have already chosen a business structure. The business structure can be changed to benefit the business owner.
Attend an “Ask The Accountant Session” for assistance every Wednesday and Thursday.
Did you know your accountant can help you with business entity selection and filing? Accountants will explain how business entities will affect your taxes, bookkeeping, and financial reporting systems.
Here’s an additional article about S-Corps and C-Corps from Fox News!