Business Entities & Taxes. What to do!
Business taxes are a confusing subject, but it is not as difficult as you think. The first step to
filing your business taxes is understanding what type of tax entity you have created. This will
determine how much money and the type of information you need to collect for your company.
This blog post discusses different types of entities that are commonly used by companies who
file their own taxes and provides tips on what they should do in order to file properly.
If you’re unsure about how to start getting prepared, this article has the answers!
Let’s start with defining what a tax entity is. A Tax entity is any Person, Business, individual, or
corporation which are required to file tax returns. As a business, there are multiple different
entities. It’s important to determine the right entity for your business and situation. The different
types of entities are: Sole Proprietorship, Partnership, a Limited Liability Company (or LLC), an
S Corporation (or S CORP),& C Corporation.
Now let’s go into the details about each entity.
S Corp
when creating an S Corp, your business has to meet certain standards set by the IRS.
The business must be a domestic corporation, exceed no more than 100 shareholders, have
only one class of stock, and not fall under the ineligible corporation list provided by the IRS
which includes examples as “certain financial institutions, insurance companies, and domestic
international sales corporations’”. In addition, your shareholders may not be partnerships,
corporations, or non-resident shareholders. As an S corp, if you own and work in the business,
you must be paid as an employee, receiving fair compensation. When it comes to tax time,
you’ll file both the pay as an employee and some of your profits from the business. You’ll also file
a 11205 form. It’s important to do the research when choosing your business filing, as other
factors may play a role in which entity is best for you.
C Corp
Structuring your business as a C Corp separates the business entity from the
individuals who own the company. This negates the pass-through income completely and has
the business file its taxes using an 1120 form. C Corps are taxed at a 21% flat rate. Once taxes
are paid, you are then able to share the profits between the shareholders. This is done by using
dividends, which are also taxed (again). Each entity has pros and cons. Choosing the right
entity and keeping up with the IRS regulations can be challenging.
Sole Proprietorships
Classifying as a sole proprietorship states that you own and run your
business by yourself. This means that the IRS views your income and the business’s income as
one, and your business is not considered a separate entity from your personal assets. When
filing your returns, your assets or liabilities and your business’s assets and liabilities are filed on
the same 1040 return. As a sole proprietor, you may be eligible to deduct up to 20% of your
taxable business income (or QBI – qualified business income). This is called “pass-through
income”. The IRS will look at the type of business you run, and the amount of pass-through
income that your business has made. If your taxable income amount falls below the taxable
income level for the year, you may be eligible to apply these deductions.
Partnership
a Partnership is when more than one person decides to run a business together.
It’s important to create an action plan for you and your business partner(s) when it comes to
taxes. Most plans outline how the partners will share the business assets, income, and debts as
well as outlining each partner’s contribution efforts. Similar to a Sole Proprietorship, the gains
and losses are filed on the individual’s tax returns. You and your partner(s) will report your taxes
by filing a 1065 form. Mirroring the Sole Proprietorship, you and your partner(s) may be eligible
to write off up to 20% of your QBI
LLC
– There are two types of LLCs; Single member, or multi-member. A single-member (or
disregarded entity) LLC can be taxed similar to a sole proprietor, potentially taking advantage of
pass-through income. A Multi-member LLC is taxed similar to a partnership. An LLC can also
elect to be taxed as an S or C Corp if deemed applicable by the IRS. Unlike a sole
proprietorship, forming an LLC will separate your assets, providing some liability protection.
When it comes to taxes, you want to make sure that your business is properly set up and filing
the right type of tax return.
Questions? Contact Us Today!
The last thing any small or medium-sized business wants is an IRS
audit! If this sounds like too big of a task for you at this time, don’t worry. Our experienced team
specializes in helping entrepreneurs navigate these muddy waters so give us a call today