Tax season is on the horizon, and it’s the best time ever to structure your business. As different business structures affect the amount you pay in taxes, you must choose a suitable structure for your business.

But choosing a structure can be quite tricky if you don’t know about the different types. According to the IRS, there are five types of business structures. In today’s piece, we’ll break down all the different business structures so that you can choose what’s best for you.

SOLE PROPRIETORSHIP

As suggested by the name, you have your business’s full control and power in this business structure. You are considered the sole proprietorship even if you haven’t registered it as any other business.

Although sole proprietors are able to get a trading name, they are held personally liable for debts or any obligations. As a sole proprietor, you aren’t subjected to corporate taxes or double taxation.

If you own a small business and want a simple structure, a sole proprietorship can be a great choice!

The kind of organization a chart of accounts is used for determines how it can be made. Your chart of accounts may or may not have categories present in other charts depending on your business's nature. Usually, an accountant with considerable knowledge of practical bookkeeping can design a COA for your business.

LIMITED LIABILITY COMPANY (LLC)

LLC or limited liability company lets you enjoy the perks of both the partnership and corporation business structure. LLC helps you separate personal liabilities from your business’ liabilities.

Loss and profit in the business can be easily passed through your personal income without facing corporation taxes. But note that the LLC business structure requires every individual to pay the self-employment tax towards Medicare and Social Security.

Mid to high-risk businesses favor LLC so they can protect their personal assets without paying corporations like taxes.

PARTNERSHIP

Partnerships are one of the simple business structures for two or more people to run a business together. Commonly, you’ll come across the following two types of partnerships structures.

LIMITED PARTNERSHIP (LP)

In a limited partnership, only one partner has unlimited liability. And others are cornered with limited liability and restricted control over the company. The partner with unlimited liability is bound to pay self-employment taxes.

LIMITED LIABILITY PARTNERSHIP (LLP)

LLP is just like LP, but the limited liability is given to each and every single partner. Furthermore, LLP guards each partner from the debts and complications they aren’t responsible for.

A partnership structure is perfect for people who are just testing out their business idea.

COOPERATIVE

It’s a business structure that involves the ownership of people who are being benefited by the business’s services. Members or user-owners receive the profits and earnings according to their designation in the business. A person can become part of the cooperative by buying shares.

This business structure is opted by businesses which are based on providing services directly to customers.

CORPORATION

C CORPORATION

C Corp is one of the most common business structures for large-scale businesses. It operates as a separate entity for owners and shareholders. This structure is subjected to double taxation and corporate income tax. Moreover, when the entity sale and profits are divided, each shareholder is subjected to pay personal income tax.

Businesses who are into venture capital funding or in-need of profit-sharing options often opt for the C Corp structure.

S CORPORATION

If you don’t want to lose the perks of the C Corp structure but avoid the double taxation problem, then S Corp is the way to go. S Corp business structure is subjected to pass-through taxation, which is way more flexible than double taxation. However, S Corp business structure has strict limitations on the number and types of shareholders.

S Corp business structure is a good choice for businesses who like the C Corp structure but want to avoid double taxation.

CONCLUSION

Now that you know about the types of business structures, choose one according to the nature of your business, and save money in this tax season. If you have any questions about your business structure, or how to change it, let the team at Hall Accounting Company know and we will set up a time to discuss. Please reach out to Josh Hall at Josh.Hall@HallAcctCo.com or Jeremy Hall at Jeremy.Hall@HallAcctCo.Com for more information. From tax filing strategies to tips on bookkeeping and accounting, we’ve got you covered.

FUTURE IMPORTANT DEADLINES

1/15/21
Estimated Quarterly Tax Payment for 2020 Tax Year Due
IRS Deadline for Quarterly Estimated Payments for 2020 (Form 1040-ES)