Small Business Should Never Underestimate Taxes
The Internal Revenue Service has been more active in targeting small businesses for tax audits in the last several years. New businesses have spent 2.5 billion each year preparing taxes and answering questions from the IRS about tax return inquiries.
However, there are things that any new business can do to lessen its tax burden. We will discuss how choosing the right business entity can make your life as a new entrepreneur much easier in the coming future.
One of the most important things you can do is be aware of the different types of legal structures that exist and how that affects your overall tax and liability burden. You should be fully aware of the different types of business entities and what that means for your business.
What is a business entity?
One or more natural persons create a business entity to carry on a trade or business. Business owners often favor corporations and LLCs because they offer several layers of protection for their owners.
The following are types of business entities:
- Limited liability company: A registered business with limited liability for all members
- Professional limited liability company: An LLC structure for professionals, such as doctors and accountants
- C-corporation: An incorporated business composed of shareholders, directors, and officers
- S-corporation: An incorporated business that is taxed as a pass-through entity
- Professional corporation: A corporate structure for professionals, such as doctors and accountants
- B-corporation: A for-profit corporation that is certified for meeting social and environmental standards
- Nonprofit: Corporations: A formed primarily to benefit the public interest rather than earn a profit.
If your company is going to be fairly small a sole proprietorship might be the right business entity for your needs. You, as the owner, will be in control of all day-to-day decisions and profits.
The greatest disadvantage of a sole proprietorship is that there is unlimited liability. The owner will be personally responsible for business debts and losses.
This is great for the type of person who truly enjoys independence and wants to make their own rules without answering others. You are your company and are okay with there being no formal division.
The business and the owner are legally the same. From the IRS’s perspective, the business is not a taxable entity. The company assets and liabilities belong directly to the company owner.
A partnership is similar to a sole proprietorship except that there is more than one individual that owns the business. The liability of the partners for the debts of the company is unlimited and this means that each partner is jointly and severally liable for the partnership’s debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts of the business.
If you are someone who enjoys working with a team and does not want to shoulder all the responsibility for the company yourself, a partnership might work for you. If you have the right blend of personalities you can complement each other quite well and be stronger than any of the partners could ever be on their own.
As with sole proprietorships, the business and the owners (two or more) are legally the same. A partnership is not a taxable entity under federal law.
A limited partnership contains two distinct types of partners:
- General Partners
- Limited Partners
The general partners run the day-to-day activities of the business. The general partners are also personally liable for a business’s debts and liabilities.
The limited partners do not have much to do with the way a company is run. They have limited liability concerning a business’s debts and they usually pay fewer taxes regarding the profit. These are silent investors who bring in money but do not run the business.
If you want to retain primary authority in your organization but definitely could use some other sources of cash then a limited partnership would be a great compromise.
C-corporation (c-corp) are separate entities from their owners. A c-corp consists of shareholders (the owners), a board of directors, and officers who have control over the corporation. One person can fulfill all these functions.
The great advantage of a c-corp is that the owner/owners are not personally liable for the debts and liabilities of the company. The disadvantage is that there is double taxation on profits. The government will tax the corporation as a separate entity. You should think of the corporation as a fake person in the eyes of the Internal Revenue Service.
This is a great model for those who want to start a company that is quite large in scope and size. However, you will be answerable to your shareholders for the good and bad outcomes of your business decisions.
If your corporation has fewer than 100 shareholders who are all individuals, not corporations; have only one class of stock, and are owned by U.S. citizens or resident aliens you could turn your business into an S-Corporation (s-corp).
An s corp is not subject to double taxation as a c corp is. An s corp’s revenue is not taxed at the corporate level. It is only taxed when paying out as salaries or dividends to shareholders. An s-corp is often a better choice than a c-corp for most small businesses.
It should also be noted that corporations have a lot of regulations regarding paperwork and documentation. This is not an entity for you if you want to be footloose and fancy-free.
Limited Liability Company (LLC)
Limited Liability Companies are extremely popular among many business owners because they often combine the best both worlds when it comes to liability and taxation.
These hybrids clear their owners of personal liability for the business’s debts or liabilities. They also allow the profits of the company to “pass-through” to the owner. An LLC will let you avoid the double taxations of corporations.
At the end of the day, you are the one who should decide what business entity best suits your needs. Make sure you consider important factors like taxation and liability. You should also go to your secretary of state’s website to find out what it takes to formally register your business.
Getting A Tax Resale Certification Is One Of The Best Things You Can Do As An Entrepreneur
As a self-employed person, getting a tax resale certificate can save you money on taxes.
In short, a tax retail certificate allows you not to pay sales tax on items that you plan to resell. This can also apply to supplies that are going to be used in products that you will resell, such as wood for a cabinet.
However, the process can be difficult and the rules are different for each state. That is why TaxResaleCertificate should do all the hard work for you. We can make sure that you get all the advantages of a tax resale certificate without having to deal with the hassle of government red tape. Let us handle the hard stuff so you can proceed to run your business with confidence. Make sure you check out our second blog in this series so you can learn even more valuable information about tax resale certificates.