Pay the right amount of taxes: Choose your business structure.

Congratulations on starting the journey of starting a business. One of the first steps to formalize your venture is registering with the IRS as a business entity.

The Internal Revenue Service offers many schemes or categories under which you can register a business depending on their structure. There are differences on the legal and tax rights and obligations.

Find out the key features that identify each one of the business structures.

Sole Proprietorship

As the name describes it, this type of unincorporated business is registered to a single proprietor with complete control of the business. This way you could get a trade name, but the business assets and liabilities aren’t separated from your personal responsabilities, and you could have a hard time getting a credit from banks.

This structure could be a good choice for entrepreneurs who want to test a business before becoming a fully formal business.

Partnership

One of the simplest structures where two or more people are registered as owners of the business, were both contribute with assets and they share the losses that the company may have. The most common kinds of partnership are:

• • – Limited partnerships (LP): One partner with unlimited liability, the rest of them have limited liability.

• • – Limited Liability Partnerships (LLP): Every owner has limited liability, which protects them from debts incurred from the business or other partners actions.

This structure doesn’t pay income tax, instead the profit and losses are transferred to the partner’s taxes fillings. 

Corporation

Corporations offer higher protection to the owner’s assets, as it becomes their own entity that may have different tax liabilities from the shareholders.

• – C Corp.: A legal entity separated from their owners. Usually these pay double taxes; when the corporation makes profit, and when the shareholders receive their profits.

• – S Corp.: Special type of corporation that avoids the double tax payments that occur on a regular corporation. May vary from state to state and requires to meet special requirements.

This structure pays taxes and makes profit independent of the owner’s actions.

Limited Liability Company (LLC)

This structure offers the protection of personal liabilites of a corporation structure without the double payment of taxes on receipt of the shareholder’s earnings. Depending on the number of members (owners) it may vary their tax rights and obligations.

This structure’s regulations and requirements to become one may vary from state to state.

For further information on tax obligations on each one of these business structures we recommend visiting the IRS official website, or getting professional advice focused  specifically on your case and your business goals, as the business structure may influence your day-to-day operations.

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