3 Ways Your Business Structure Affects Your Taxes

There is no one-size-fits-all guide to doing taxes for your business. This is because businesses vary in a variety of ways including size and ownership. The payroll and tax experts at Future Systems have created a simple guide to outline the ways business structure affects your tax process.

Types of Businesses:

• Sole proprietorship: The company is owned by one person and is the owner is taxed through pass-through taxation. The owner is fully liable for the company.
• Partnership: The company is owned by two or more people who have invested in the business and the owners are taxed through pass-through taxation. The owners are fully liable for the company.
• Limited Liability Corporation (LLC): The company is owned by multiple people and the owners are taxed through pass-through taxation. However, they have limited liability.
• Corporation: The company is authorized as a single entity though there may be many investors. 
• S Corporation: The company is authorized as a single entity, but qualifies for pass-through taxation that must file a business tax return.

1. How You Pay

The forms you need to fill out and deadlines you are subject to are affected by the structure of your business. For example, a sole proprietorship will fill out different forms than a corporation. 

Here are the tax forms each structure currently must fill out:

• Sole Proprietorship: Schedule C of Form 1040
• Partnership: Schedule K-1 of From 1065
• LLC: Schedule C of From 1040
• Corporation: Form 1120
• S Corporation: Schedule K-1 of Form 1065

You can view deadlines for your business structure on the IRS website.

2. How It Is Paid

Business structure also affects whether you are taxed personally for business income or as a separate entity. For instance, in a sole proprietorship, an owner is taxed for business income through pass-through taxation. A corporation, on the other hand, is taxed as a business entity then shareholders receive dividends. This allows corporations to keep some money in their business. The downside is that the money shareholders receive is then taxed again as personal income.

• Sole Proprietorship: Pass-through tax
• Partnership: Pass-through tax
• LLC: Pass-through tax
• Corporation: Separate entity tax
• S Corporation: Pass-through tax

3. What You are Liable For

Smaller companies assets, liabilities and income are considered to belong the the business owner(s). In a partnership, for example, you are not only liable for your own professional actions, but also for the actions of your partner(s). Corporations and S Corporations have the most liability protections of any structure, while LLCs have limited liability.

Now that you understand business structure and how it can affect your taxes and operations, you can find the necessary forms and tax deadlines to properly file your taxes. Simplify the process by letting the experts handle your payroll and tax filing for you. Contact Future Systems today!

- Your Team at Future Systems