Doing a tax audit

Tax Implications of Different Business Structures

You will make several decisions when starting a business. While some have minimal impact on your profits and legal compliance, this is not the case for the business structure you choose. For most people, picking the structure to register your business under might seem like a simple undertaking that only requires the guidance of various online articles. While these articles might seem comprehensive, they will not take into account the dynamics of your business.

It is thus essential to get good solicitors in London to assess the specifics of your company, then advise you on the structure that suffices for your venture. This way, you are sure of matching your company dynamic to the structure you pick. Here are the business structure options you have and their tax implications.

Sole Proprietorship

This is used by business owners that set up and run their companies alone. A business under sole proprietorship has no distinction from its owner. When filing your taxes, you will report your losses and income from the company as your income and will not file tax returns for your company. A sole proprietorship is an ideal structure for those looking to keep their operation as simple as possible and are not making considerable annual profits. It is thus commonly used by those who are just starting on their entrepreneurship journey.

Limited Liability Company (LLC)

Limited liability company on a tabletIn case a business owner is sued under sole proprietorship, then the business is also roped into the suit. An LLC has a separation between the business owner’s personal life and the business itself. As regards taxation, an LLC is a pass-through entity, meaning that its taxes will be paid under the owners’ taxes just like in sole proprietorship. You will thus pay taxes for the profits you receive from the business in your returns as self-employment taxes. An LLC is ideal for entrepreneurs who want to separate their individual assets and business liabilities, and prefer minimal paperwork and formalities.

Corporation

This structure completely separates your business and personal liabilities, thus protecting your assets from business liabilities. In a corporation, your business pays its taxes separately from your personal taxes. This might lead to ‘’double taxation’’ since the company is first taxed and then you are taxed for the profits you get from it. Even so, you can choose to have an S corporation where business taxes will be passed to the owners.

Partnership

Here, two or more people will share the ownership of a company along with its profits and losses. You will file yearly information detailing the income, deductions and gains of your business but your company will not pay income tax. The business owners instead pay the taxes in their personal tax returns based on the prevailing corporate tax rates.

The costs of hiring a law firm to guide your choice of a structure from the above seem unnecessary, more so when grappling with the expenses of setting up and running a company. There are nonetheless legal penalties for breaching local and federal business legislation and money you will lose in taxes with the wrong structure. These implications are far more expensive than those of hiring an attorney.