How Your Corporate Structure Impacts Your Business Taxes
It’s important for business owners to consider their business’s taxes from the very beginning. In fact, it’s something that you should think about before you even officially open your doors for business. When establishing a new company, you’ll need to select a corporate structure. While there are many factors that impact the right designation for your business, you should seriously consider how each option available to you impacts your business’s taxes. Keep reading to find out how corporate structure impacts the taxes for your business.
There are several different types of designations that fall under this umbrella, but most of them are taxed similarly. Corporations are recognized as separate entities from their owners and shareholders, which means that the business itself must pay its own taxes. The corporation can also claim business deductions, receive tax credits, and so on, just as you can do with your own tax return.
Because corporations are taxed on their profits, this means that the business’s income is actually usually taxed twice: once when the business profits, and again when the owners and shareholders pay taxes on their dividends. So, if your company is registered as a corporation, be aware that the profits will be taxed twice, and that the business will need to file its own tax return.
It’s also important to know that corporations require especially detailed reporting and record-keeping, so it’s a good idea to work with an experienced business accountant if you select this designation for your business.
While non-profits are a type of corporation, we’ve decided to talk about them separately, because they’re taxed very differently from other types of corporations. If your new business is a non-profit, you’ll need to register with the IRS for tax-exempt status. To maintain that designation, however, you will need to stick to very strict requirements regarding how you use your profits. Again, it’s important for these corporations to work with an experienced accountant to ensure you remain compliant with IRS standards and can retain your tax-exempt status.
Sole proprietorships are a popular business designation for first-time business owners. This is because they’re very easy to set up and can allow you to establish your business and test your products before establishing a more formal type of business structure. Additionally, this type of business makes it easy to handle when it comes to your taxes as well. This is because a sole proprietorship is a pass-through entity, which means that all of the business’s profits and losses are reported on your personal tax return. All you have to do is fill out a Schedule C and Form 1040, then file those forms along with the rest of your personal tax return.
There are two different types of partnerships that are commonly used for new businesses: limited partnerships (LPs) and limited liability partnerships (LLPs). The primary difference between these two business types is connected to how legal liability is handled. However, we won’t go into those details here, as we’re primarily concerned with how these designations are taxed. Both LPs and LLPs are taxed in the same manner, which is very similar to how sole proprietorships are taxed. Like sole proprietorships, partnerships are pass-through entities. So, the business’s profits and losses are passed on to the partners in the business based on their percentage of ownership. Those profits or losses are then reported on the partners’ individual tax returns.
The profits and losses from these businesses are provided to each partner through a tax form known as a Schedule K-1. Each partner will then report the profits or losses shown on the K-1 using a Schedule E, which they will file with their personal returns. The partner’s business income is subject to each partner’s individual income tax bracket. If the business suffers a loss, each partner can often deduct their share of the loss from the taxable income.
Sometimes, partnerships will have “limited partners.” These partners are taxed in a slightly different manner than active partners in the business. They must report their income or loss as a “passive” loss or “passive” income. This is not subject to self-employment taxes. However, there are limits to how passive losses can be used on your return.
Speak to a CPA
If you’re establishing a business, contact Demian & Company CPAs today to discuss the tax implications of each business designation. We can help you to select the designation that best suits your business’s structure and taxability. We can also help you to ensure you’re filing your business taxes accurately each year. Call now to schedule a consultation.