business structure and taxHow choosing your business structure can affect the tax you pay

When you start up a business you have to decide what kind of structure you want for it based on the amount of employees and partners. It is basically a way of declaring how many people are liable to pay tax and how much so you should ensure you choose the right structure so you don’t end up paying too much, or not enough tax (and could end up in trouble). If you are not 100% as to which structure you need to register under you should speak to your solicitor or seek alternative Legal advice to be sure.

Sole Proprietorships
If you are trading alone then you do not need to register anyone and are classed as a Sole Trader. Sole traders are usually working alone with no employees and generally fund their own ventures. Without other people in partnership for you there are no discrepancies as to how the business is run. If you are part of an LLC (I will explain further in the article) you will not be classed as a sole trader as you will already be receiving benefits from having limited liability.

Partnership run businesses
If there is more than one person in control of your business, for example if you have a partner or more, then your business structure should be partnership. This will mean that each of the partners will have to contribute towards the money, property or physical or academic labor in some way. Each partner will have to share any gains or losses with the other partners.

As part of a partnership run business you will be required by law to return detailed tax information to the relevant authorities. Every partner must return an individual tax return to show the information even if it is the same as the other partners. It is a good idea to get an accountant to do this for you unless you know exactly what you are doing or familiarize yourself well with QuickBooks which will allow you to do your own books and save you money.

Corporation
A corporation is where people each have a share in the business by contributing financially, with property or by contributing both. This will mean that they are also entitled to some of the capital gain. The deductions are the same as those who have sole proprietorship but you may be entitled to tax deductions too. The annual capital is taxed before gains are distributed amongst shareholders but tax is applied again after each person has received their cut. The shareholders are not able to deduct losses because these will have already been applied when the company was originally taxed. If the assets of the corporation are worth over $10 million they will need to return 250 tax statements electronically for any years that end on the last day of December or afterwards.

S Corporation
To enable corporations to pay tax only once, S corporations do not need to be taxed on the company’s gross earnings. The tax is taken only after the money has been shared amongst shareholders. To be eligible for this kind of business structure the company must be domestic, only have shareholders that are allowable, they cannot have over 100 shareholders or shareholders that are deemed to be alien and not resident to the business Country. Their stock can only be one kind, any more would have to come under a different classification. Ineligible corporations are also not allowed to register as an S Corporation.

Limited Liability Company
An LLC, also known as a Limited Liability Company structure registration will depend on each States regulations. You will need to check first if you would like to start an LLC. Most States will not restrict your ownership entitlements but the owners will be known as members. You can have an LLC even as a sole owner in most States. Banks and companies that deal with insurance are not able to join as an LLC and in some States there are other limitations too.
It will be up to the IRS as to whether they treat the company as a corporation or partnership. An example of this is a domestic LLC which has a minimum of two members. They will be seen as a partnership for tax purposes unless they elect it to be a corporation by filling in form 8832. Being part of an LLC can reduce the amount of tax you are liable to pay.

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