Business Taxes

Sole proprietorships are a popular choice for many new business owners because so little is needed to set them up. Apart from local business licenses, there are minimal government fees and paperwork. On the other hand, there are also considerable risks to consider—for example, your personal assets are vulnerable to creditors and other liabilities such as lawsuits. You also don’t get to take advantage of certain tax breaks that are reserved for more formal business structures such as Corporations or Limited Liability Companies. Most importantly, as a sole proprietorship, your company name is not protected. In other words, there is nothing to prevent another company from incorporating under your business name.

Similar to sole proprietorships, partnerships are extremely easy to set up and maintain, requiring no government fees or annual state paperwork. On the downside, you and your partners are each held fully responsible for all of your company’s debts. This means if you or one of your partners defaults on a company loan, creditors can go after your personal bank accounts, property holdings and other assets to satisfy the entire loan.

Corporations are the standard for many businesses in today’s market. The primary reason is that incorporating shields you and the members of your company from personal liability. In other words, if your business hits hard times, creditors cannot go after your personal assets to make up for any company shortfalls. But protection from personal liability is not the only benefit that comes with incorporating. The corporate business structure also offers significant tax savings, greater business flexibility, company name protection and increased opportunities for raising capital. You can also choose to set up your corporation as either a C-Corp or an S-Corp in order to take advantage of different tax options.

If you’re ready for the big time and want to sell shares of stock in your business, consider a C Corporation. All publicly-traded companies are C Corporations which are considered a separate legal entity from the owners (also called the shareholders or stockholders) of the business. Because of this, the shareholders are not responsible for fees, liabilities and losses associated with the business.

It is possible to avoid the double taxation of a C Corporation by forming an S Corporation. Here, the corporation’s income is divided among all of the shareholders who report the earnings on their individual tax returns. This is a tax-efficient way to structure your business if you expect losses in the short term because the individual shareholders can report the losses on their tax returns rather than paying the double taxation of the C Corporation.

For many new entrepreneurs, choosing a business structure comes down to liability protection, tax savings and convenience. LLCs require fewer formalities and less on-going paperwork than corporations while offering the same personal liability protection and tax flexibility. Just as with a corporation, your company name is protected, and you and the other members of your company are shielded from creditors and other company liabilities such as lawsuits. But with an LLC, you only have to keep minimal company records, and there is no limit to the number of members your LLC can maintain.