Before you can legally operate your business, the first thing that you have to do is finalize the legal aspects. The way that you structure your business will dictate the amount of taxes that you are required to pay and the type of paperwork that you have to do. More importantly, your personal liability in case of bankruptcy will also be determined.
Consider these four types of business structures and learn how you can choose between them.
1. Sole Proprietorship
Solo proprietors have a minimal tax obligation. You can even use your losses to offset your spouses’ income. The company’s profits and losses are filed using Schedule C of IRS (Internal Revenue Service).
If you choose to do business alone, you are qualified for the sole proprietorship structure. You enjoy all the profits, but you also shoulder all losses. Business operations are fully controlled by you, but you also have unlimited liability. Your personal assets can be seized to settle the company’s debts.
For businesses that are owned by two or more individuals, the partnership structure is beneficial in so many ways. Each partner is expected to contribute their time and money. However, this arrangement doesn’t make your legal liabilities lighter. If the company is unable to pay its debts, the creditors can confiscate the personal assets of each business partner to settle the liability.
The partnership’s income is filed using Form 1065 of IRS. Each partner will declare their share of profits and losses as part of their individual tax returns.
Compared to sole proprietorship and partnership, this structure can protect your personal assets from the liabilities of your business. When the corporation is unable to cover its losses and debts, the properties and bank savings of the shareholders are not in danger of being seized by the creditors.
Income is taxed at a corporate level, and once the income is distributed to the shareholders, personal taxes must also be paid. In addition, all activities of the corporation must be strictly documented.
4. LLC or Limited Liability Company
The LLC is a hybrid business structure in that it offers the tax flexibilities of a partnership and the limited liability features of a corporation. It is becoming the preferred business structure of entrepreneurs because of the protection and benefits that it can provide.
There are two types of LLCs: single-member and multiple-member. Whether the LLC is owned by one or multiple members, the LLC itself does not pay taxes. Instead, all profits and losses are declared by each member on their individual tax returns. If this business structure doesn’t suit your company, maybe you should choose an S-Corp instead of an LLC, since there are many differences between these two business structures.
The Consequences of Not Paying Your Taxes Properly
For each business structure, the tax requirements are different. You have to choose wisely which particular structure is beneficial to your situation. Failure to file and pay your taxes may possibly result in penalties or seizure of your properties.
However, you shouldn’t be worried when you have a sincere intention to settle your tax debts. If you feel burdened with the taxation aspect of your business, hiring a professional will give you peace of mind.