When you are looking to form a business, one of the most crucial decisions for you to make is what kind of business entity you will choose. Many different factors go into this decision, and for the most part, no one type of business entity is better than another.
It’s about considering what is important, and what’s not so important to you, and choosing the entity that fits what you are looking for.
One common consideration for business owners is taxes, and what kind of business will maximize your tax benefits, and minimize your tax liabilities. Here is a brief rundown of how the main types of companies that you can form will affect you when it comes to taxation.
While there can be some benefits to a sole proprietorship, it often is not the best vehicle for tax reasons. All profits of the business will be subject to being taxed, even money sitting in the bank at the end of the tax year.
Although not related to taxation, a sole proprietorship often provides little or no legal protection for its owners, the way an incorporated company would do.
However, you have the ability to deduct or write off expenses. Just be sure that you keep separate records for the business, to avoid compiling your own income or expenses, with the business’ financial records.
An S Corporation is a pass-through entity, meaning that the business itself doesn’t pay income taxes. Instead, the income passes to you, individually, as the business owner, which could increase your personal taxes.
If you have a number of deductions at the personal level, however, this may be a good option for you. This is because you personally may have more deductions available to you than the company would have if it had to pay taxes on that income.
S corporations also get a 20% deduction in taxable income that is passed to you individually. This will allow you to reduce the taxable income that passes from the business to you by 20%.
This is a more traditional corporate entity, and it has a number of benefits. However, C corporations often are subject to being taxed twice. First, the business is taxed on the income it makes, and then the income that goes to company shareholders is also considered taxable income. The company cannot deduct the dividends paid to shareholders from its taxes.
It is important to note that the law does allow you to sell up to $5 million in shares tax-free after the first five years, and the maximum corporate tax rate is currently capped at 21%.
Tax laws for LLCs can vary by state, so if you do business in multiple states, be sure check each applicable state law. As a general rule, LLCs don’t have individual tax laws.
They do get the 20% taxable income deduction, and in some cases, the owner of the LLC can choose whether to be taxed individually (pass-through) or whether to have the LLC pay taxes on the income that is earned.
If you need any help regarding your estate or other legal matters please reach out to us directly here and schedule a call with one of our paralegals on our scheduling page here.
As a blog exclusive, we also have some free estate planning resources for you! View our life planning guide and our estate planning checklist below to either begin your estate planning or check to be sure you're up-to-date on your documents.
Sivia Law presents a six-step checklist to create your own “Life Planning Guide.” This guide helps you advise your loved ones so that they can honor your wishes for your health care desires as well as for the distribution of your estate.
Click here to learn more!
When it comes to planning your estate, having a checklist and important documents in hand is a key part of the process.
Click here to get started with your estate planning checklist!
If you need help with estate planning or any other legal concerns, we are here for you. Don't hesitate to contact our firm directly for assistance. Our dedicated team is ready to provide support and guidance to you and your loved ones during important life transitions.
Whether you're ready to schedule a strategy session to discuss your specific needs or if you're interested in exploring our wide range of complimentary guides and additional resources, we encourage you to get in touch with us.
With licensed attorneys and offices located in both Illinois and Missouri, we are well-equipped to serve clients in these regions. Reach out to us today and let us leverage our expertise and care to guide you through the legal process.
Begin your journey by taking advantage of our collection of complimentary guides.
Simple & Convenient, Cost Effective, Attorney Reviewed Documents.
Click the button & fill out the form so we can better understand how we can help.
