With every business officially registered in any state in the US, taxes are due depending on the kind of business registered, the industry the business belongs to, income brackets, and a multitude of other factors. Each business differs in the amount of due taxes as there are tax exemptions and reductions that can be filed. Regardless, companies no matter the size are still expected to pay the federal and local governments–the only difference is the amount to be paid.
If you are a sole proprietor who wants to take your business to the next level by being incorporation, you must know that there are two different corporation structures that you can have for your business. There is what we call a Limited Liability Company (LLC) or a corporation, which has two popular types under its umbrella–an S corporation and a C corporation. Each corporation type has its own advantages and disadvantages in terms of liability protection and tax expenses.
When choosing what company structure to use, both an LLC and a corporation should rank high on your list. Each type comes with its own set of advantages and disadvantages. It is best to work with legal experts like Cloud Peak Law who can guide you in exploring the different company structures available and what best fits your unique requirements.
An LLC protects the owners of the business from being personally held liable for the activities and actions of the company. This means that the owners’ personal assets are not affected in case of a filed lawsuit. It also does not have the formal corporal management structure–it is more flexible in assigning work and responsibilities. Taxes will also be filed for the owners’ personal income tax return, which means they would be paid individually.
An S corporation has the same tax structure as an LLC. The difference is business owners of an S corporation can use business losses as deductions on their personal tax returns. The disadvantage of an S corporation is it has a limited number of owners which means that investors and capital are also limited compared to a C corporation which can have an unlimited number of reasonable owners.
C corporations are subject to double taxation. However, their advantage is that owners have the ability to possess different stock options and are only taxed on the actual number of dividends they receive. C corporation owners can take advantage of lower income tax brackets by leaving profit money within the corporation.
As mentioned above, there are specific advantages of having your company registered as an LLC or an S or C corporation. Your company structure plays a significant role in determining the amount of due taxes you need to pay. How a business owner is paid and taxed as the owner of a company is a major deciding factor in choosing what structure to use. Asking a legal firm or your personal tax advisor about which form of business best fits your needs would benefit you in the long run. You would not want to be tied up to a company that is putting more money in due taxes than in your savings account, right?