BUSINESS ORGANIZATIONS AND TAXES

 

All forms of business organization have advantages and disadvantages for tax purposes, depending on your resources and needs. An experienced tax attorney can help you determine the best way to work within your situation.

 

The following list describes some forms of business organization and their relation to tax law:

 

• Sole proprietorships. A sole proprietorship is simple, cheap, and easy to begin; anyone can start a business and declare it a sole proprietorship. The owner owns all assets and is personally responsible for all liabilities, including taxes. Business income is counted as the owner’s personal income, and the owner can deduct business expenses. Sole proprietors with employees must obtain a federal employer tax number. 

 

• Partnerships. When two or more people jointly own a business, the business is a partnership. Partners share management responsibility, and each partner counts their share of all income, deductions, and obligations as personal income or obligation.

 

• S corporations. Small corporations with 75 or less shareholders can organize as a “S” corporation. For tax purposes, the shareholders are treated as partners, and report their share of the corporation’s income, assets, and debts on their personal tax returns. 

 

• C corporations. Standard business corporations are known as “C” corporations, because they are covered by Subsection C of the IRS Code. “C” corporations are independent of their shareholders for tax purposes. They can have an unlimited number of shareholders, who must only file taxes for income distributed to them by the corporation.

 

• Limited liability companies (LLCs). LLCs protect their owners from full liability, and they cannot be held financially responsible for more than they have invested. However, LLC owners report their share of profits and losses as individual income. An LLC therefore contains elements of both a partnership and a corporation.