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 personal property protection for each owner. However, in an LLC, each owner (individual or partners) are responsible for their portion of the taxes and debt (liabilities). If a client/customer sues the owner(s) of an LLC or Corporation the owner(s) personal property is protected. The courts would only consider business property.
Each business structure will impact taxes as well.
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 an 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.
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.