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Starting a business means endless decision-making. From the business’ name to the strategies you want to pursue to the platforms you want to tap, making choices does not stop. However, if there is one decision that is crucial to your business’s future, it is deciding the type of tax structure you want for your company.
Understanding the options can help you decide faster and more effectively. This article will show you four different types of business entities you can choose and how each can affect your taxes.
Type 1: Sole Proprietorship
If you own and handle the business alone, then you could use this structure. The sole proprietorship is the simplest and most common structure that beginner entrepreneurs for which can opt. If you register with this business type, the Internal Revenue Service will view your identity and your business as one. That means your taxes and your business taxes are the same. Generally, however, you have no tax aspects in this type of business.
Benefits:
Type 2: Partnership
If you own a business with a partner or set of partners, your business can fall under the partnership category. More than one person contributes to all business aspects in this setup, including finances, skill, and labor. At the same time, all partners share the profits and losses of the business.
If you apply to this type of business entity, every registered business owner within the partnership still needs to report its gains and losses on their individual tax returns. Taxation for this business identity might be more complicated than others, but it would not require you to pay the entity taxes.
Learn the simple steps to prepare cash flow projections to improve your business cash flows.
Type 3: Limited Liability Company (LLC)
If you want to separate the business’s identity from its owners and still get taxed as a “pass-through entity” (which means your business is not subjected to the corporate income tax or any other entity-level tax), consider this structure.
In this business structure, the owners enjoy the benefits of two different setups, making it a hybrid classification. It is a perfect mix of the advantages of the pass-through entity and sole proprietorships or partnerships. This structure also enjoys the corporation’s liability protection but with much fewer requirements and formalities.
Type 4: Business Corporation
A business identity that is legally separate from its owners falls under the corporation category. It works as if the business is another legal person existing. This setup can be more complicated when it comes to tax filing as you need to file and pay for the corporation’s taxes and your personal taxes separately.
Conclusion
Taxes play a significant factor in determining your business earnings and savings. If you want to know the right type of entity for your business, this article could help you learn about your choices, but the best way to know would be to consult your tax advisor.
If you want to lessen your business’s taxes, you need to optimize your tax strategies. If you are a small business trying to navigate its finances, we, at Fibrick, can help you. Our solutions are tailored to fulfill your business’s fullest growth potential with robust accounting systems and processes.
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