When you set up your business entity – sole proprietorship, partnership, corporation, or Limited Liability Company – there are tax differences between each one. Today, we are discussing how each business entity influences your taxes.
Sole Proprietorships
This is the easiest and quickest business entity. When you operate under this entity, you only need a Schedule C and a Schedule SE when you file your taxes.
Corporation
You have the option of going with a C corporation or an S corporation when you want to operate under this entity. With a C corporation, you will have to have a Form 1120 or Form 1120 A. When you go with an S corporation, you are limited to 100 shareholders and you must file Form 1120S and report your share of the income on Schedule K-1. Additionally, if the taxable income is $50,000 you will be taxed at a 15% rate and the maximum rate you can be taxed at is 35%.
Partnerships
Partnerships do not pay taxes since they are only reporting entities. However, the partners have to report their income and expenses on Form 1065.
Limited Liability Companies
These are the newest form of business entities. They are not able to offer tax-free fringe benefit packages to their corporate employees though. They are said to be the entity of the future at this time, but they have some issues that need to be resolved.
Closing Thoughts
Overall, you have to make sure that when you choose your business entity that it is the best for your business. However, at the same time you want to keep in mind the tax consequences.
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