Small businesses have many factors to consider when selecting a company structure, and the different taxes required from each business setup are no small matter. Here are the most common business structures.
Sole Proprietorship
There’s no separation between personal income and your business revenue on the tax return. The owner files a schedule C with profit/loss reported on their 1040. In addition to the normal income tax, sole proprietors will also owe self-employment taxes as well.
C Corporation (C Corp)
C Corporations separate the owner from the business, so the business’ taxes will be filed separate from the shareholders’ taxes. Double taxation occurs when the business’s profits are taxed on the corporate return, and then the profits are taxed again on the shareholders’ personal income tax returns.
S Corporation (S Corp)
An S Corporation does not pay tax on profits and avoids double taxation; in this setup the profits go straight to the owners/shareholders and are reported on their individual income tax returns. If the shareholder’s profits are considered a distribution, they do not owe self-employment tax on them. However, remember that if you put in work for your company you will need to pay yourself a corresponding salary.
Limited Liability Company (LLC)
For those who want to separate themselves from their business but don’t want the complicated paperwork of a corporation, an LLC can be a hybrid between the two with added flexibility when it comes to tax time. An LLC can be taxed as a sole proprietorship (the default), or as a C-Corp or S-Corp. This is the most common small business structure.
Before you determine which setup is most advantageous to you, decide what your future plans are and discuss your current situation with your tax advisor, who may recommend other factors consider.