One of the most important steps in any tax strategy is deciding what kind of entity should be formed to hold business and investment. For legal purposes, there are four basic types of ownership, partnership, corporation and limited liability company. The entity you choose should take into account both the tax effect of the entity and the legal aspects of the entity.
- Ownership -
Begin with unique ownership, let's examine the tax and legal aspects of each entity. The only ownership is not substantive. What if you do not have an entity and no partner? Only ownership is the simplest business form. You simply report your income on your personal income tax return schedule C. You do not need to keep balance sheets and limited income statements only. It's good? Wrong! This is one of the worst business forms from tax and legal standpoint.
From the tax office you will pay income tax with the highest marginal tax rate on all your income, as well as paying self-employed tax to 100% of your income. And the possibility that the IRS audits over other business structures will be at least four times higher. Therefore, unless inconveniencing your business, you will pay the highest tax rate with independent ownership.
If it is not bad enough, the only legal aspect of the owner will be exacerbated. In addition to taking responsibility for all actions, we take personal responsibility for all the actions of our employees. Do not take our word about it. Please consult a lawyer. They will confirm that the sole owner never provides asset protection.
So when do you use exclusive rights? Mostly never. The only time you may want to use ownership is for the side business where you are the only owner, the only employee, little taxable income or loss. However, consider using LLC for legitimate purposes if you use a single ownership because your business has little or no taxable income. This is the sole ownership in tax. LLC will be described in more detail below.
- Partnership -
For tax reasons, there are two types of partnerships: general partnerships and limited partnerships. General partnership is the simplest partnership. In a general partnership, two or more people share all of the management responsibilities and responsibilities of the partnership. In limited partnerships, only general partners share responsibility for management and administration. Limited partners are passive investors.
For tax purposes, partnership income and obligations are reported in form 1065 which is a tax return only for partnership. Each partner receives a form K-1 that shows the share of each item of income or loss, respectively. The profit and loss of K-1 is stated in the personal income tax return form. Partnerships usually do not pay income tax. Distributions from partnerships are not usually taxed on partners.
Common partners are usually responsible for all of the obligations of the partnership. This means that they may lose more than the amount they invested. When a lawsuit against a partnership occurs, a general partner is usually "stepping on" for judgments beyond what the partnerships themselves pay. Limited partners are usually only responsible for the actual investment amount.
Common partners must pay social security tax on their share of all normal income from partnership. Limited partners usually do not impose social security tax on any of the income from partnerships.
- Company -
According to the tax law, there are two types of companies, S companies and C companies. S companies are subject to many taxation like partnership. The income is reported in another tax return of 1120 S, and all shareholders receive K - 1 indicating the share of each item of profit and loss. The profit and loss of K-1 is stated in the personal income tax return form. S company does not usually pay income tax. Dividends from Company S are not usually taxed to shareholders. Furthermore, it is not normally subject to social security tax.
C companies are different. C corporation has its own tax law and tax rate and pays taxes. They report income on Form 1120 and pay taxes directly to IRS. Shareholders of corporation C are taxed only for distributions from corporations. These dividends are called dividends and are often taxed at a lower tax rate than other incomes.
Corporate shareholders are usually not liable for corporate debt unless they personally guarantee debt. This means that shareholders can usually lose only the amount they invested in the company
- Limited Liability Company -
For tax purposes, a limited liability company is taxed as the tax entity that the owner desires. IRS enables limited company to determine taxation method. There are some basic principles applicable to the taxation method of LLC.
An LLC with only one owner of a single member LLC is usually taxed as a sole proprietor. IRS calls this "ignored entity". Therefore, for tax purposes, LLC is ignored. However, the owner of LLC can choose to tax LLC to C corporation or S corporation (subject to the rules of ownership of S corporation).
A multi-member LLC with two or more owners is usually taxed as a partner. They can be taxed as either a general partnership or a limited partnership, depending on the responsibilities of various members (owners). However, owners of LLC may choose to tax LLC as C or S (subject to the ownership rules of S). Methods and methods taxed on contributions from LLC depend entirely on how members choose to tax LLC as a partnership, S corporation or C corporation and follow the distribution rules of the relevant tax agencies I will.
Like a company, the owners of the LLC generally do not take responsibility for the company's debt unless they personally guarantee the debt. This means that LLC members can usually lose only the amount invested in the company.
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