There are myriad different types of business structures to consider when starting your business. Your organization may be structured as a Corporation, a Limited Liability Company (LLC), a Limited Partnership or a Partnership. If you work alone, it may also be possible to be structured as a Sole Proprietorship.
When selecting the right structure for your organization, you must consider the differences in taxes for different types of business organizations. An experienced Scottsdale Arizona business startup lawyer at Lotzar Law Firm, P.C. can provide you with the information you need on how taxes are assessed for each business structure. An attorney can also advise you on the pros and cons of each type of business and assist with the requirements associated with getting started.
Taxes for Different Types of Business Organizations
Taxes must be paid on money that is earned, while deductions may be taken for business losses. Either the business or independent owners cover the tax liability and take all appropriate tax deductions for losses. In some cases, a business and its owners are each taxed on the same profit, which is referred to as double taxation and which most business owners try to avoid. Because there are different rules for taxes for different types of business organizations, the method of taxation must be a consideration when you first begin operating your organization. The tax structures for common types of businesses include the following:
- Partnerships and Sole Proprietorships – The business owners are taxed on profits and take deductions for losses on their personal tax returns. The Partnership does not pay separate taxes on income earned. Sole Proprietors are single owners who are considered one-and-the-same as their business. Partnerships are Joint Ventures with multiple owners and taxes and profits are split among the owners. Each owner is taxed based on his share of profits and may take a credit for his share of losses. Self employment taxes (Social Security and Medicaid) must be paid by Sole Proprietors and Partners.
- Limited Liability Partnerships – Limited Liability Partnerships differ from General Partnerships because the Limited Liability Partners do not take an active role in the business and their potential for loss is limited to their investments. The tax rules for General Partners in a Limited Liability Partnership are the same as the tax rules for standard partnerships. However, a Limited Partner is taxed differently. A Limited Partner does not have to pay self employment taxes on the income earned from the partnership because, by definition, he is not employed in the business.
- Limited liability Company – A Limited Liability Company can choose to be taxed either as a Partnership or as a Corporation. If taxed as a Partnership, a Limited Liability Company allows for income and losses to be passed through to owners. Profits and losses are divided up among the different owners who then claim the income or take the loss deduction on personal tax returns.
- Corporation – There are two different types of corporations. C-Corporations pay taxes on profits and owners are then taxed again when distributions are made or dividends are paid. S-Corporations, on the other hand, allow pass through taxation. The S-Corporation pays no taxes at the corporate level and the profits and losses are declared on the tax returns of individual owners.
It is important to understand taxes for different types of business organizations and make a smart choice when starting your business. Call Lotzar Law Firm, P.C. today to schedule your consultation and get help getting your business started.
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