Choosing the Right Business Entity Type – A Guide to Tax Classifications for Businesses
Starting a business means you have to choose a type of business entity. This classification determines your legal structure and some tax considerations.
Unfortunately, there is no one-size-fits-all solution to your legal structure needs. But this guide will show you how to choose the right business entity type.
Types of Business Entities
Let’s have a look at the different types of business structures. The most common are partnerships, sole proprietorships, limited liability companies, and corporations.
Sole Proprietorship
A sole proprietorship is the most basic type of tax classification for businesses. This is the best option if only one person is liable for all the profits and debts of the business. In other words, this is the best choice for those who want to be their own bosses.
Some fees you should prepare include state and federal fees, business equipment, office spaces, taxes, banking fees, and some contracts.
Partnership
The second most basic type of business entity is a partnership, which refers to a business owned by two or more individuals. There are two types: general and limited partnership.
In a general partnership, both persons equally own or share the business. Meanwhile, a limited partnership is one where one person has more control over the company, including its finances and operations, while the other contributes to certain parts.
Limited Liability Company
A limited liability company is a mixed business structure that lets business owners, shareholders, and partners limit personal liabilities without the tax and benefit headaches. The members are not responsible for the company’s debts and negligent practices in this legal entity.
Many small businesses can be LLCs. However, there are also huge businesses that can be LLCs. Some examples include Pepsi-Cola, Sont, IBM, Nike, and eBay.
Corporation
The other type of business structure is a corporation. A corporation is a legal entity separating the business from its owners. The company can be sued or sold without entirely affecting the owners.
There are several types of corporations, such as a C corporation, an S corporation, and a B corporation. Many nonprofits are also considered corporations.
How Many Owners Does Your Company Have?
This is one question you need to answer when determining your business structure. How many active owners does your company have? If you’re the only owner, then there’s no need for a partnership classification. There’s also no reason to choose a single-owner C-corp.
Do You Need Liability Protection?
Are you likely to encounter severe legal liabilities in your company? Your legal exposure may be low if you sell trinkets or writing services. That means you can be a sole proprietor. But if you sell food services, the legal liability can be significant.
Check the Consequences on Tax
Avoiding corporate taxes and payroll taxes can be advantageous for many business owners. One excellent option is an LLC, where your profits are considered income to owners. Meanwhile, an S Corp allows you to assign some profits as a salary.
