Tax Considerations To Think About When Deciding On A Business Structure

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The decision to go into business for yourself is not an easy one, and should only be made after you have armed yourself with critical information on business management and operations. Your plan should include human resource plans and policies, a plan for handling employee concerns such as a benefits package and salary structure, and the most effective ways for you to minimize expenses while maximizing profit. A big chunk of business profit is in the taxes category, and this includes corporate taxes as well as employment taxes. In order to structure your company in the most profitable way, you need to consider not only employment issues but also certain tax considerations.


Making the appropriate choice of business formation requires an understanding of the differences between the tax implications of each type of business structure. Take a look:

  • Sole proprietor: This type of business formation consists of an individual running his or her company, and the distinction between the individual and the company is virtually non-existent. In the eyes of the IRS the business itself is not a taxable entity, so all income generated for the business is reported on the individual’s return and taxed as such. Net income will be subject to ordinary income tax and self-employment tax.
  • Partnership: A partnership is very similar to a sole proprietorship, just with more owners. The tax implications are the same in that the partnership itself is not taxed, but all net income will flow through to the partners and be subject to ordinary income tax and self-employment tax.
  • Limited liability company: This type of business structure requires filing documents to incorporate in the state where most of the business is transacted, but there are no corporate taxes associated with this form of business. An LLC can decide to be disregarded, or taxed as a Partnership or an S Corporation.
  • C Corporations: These companies also have to register in the state, but unlike an LLC there is a corporate tax rate that must be paid. Shareholders must also pay tax on any distributions from the corporation.
  • S Corporations: An S corporation is registered with the state just as is a C corporation, but making the election to be an S corporation gives the owners the possibility of being treated as a flow through entity for tax purposes. This means there is not a separate corporate tax that is due, but the owners will be taxed on income paid to them from the corporation.


Many business owners elect to operate as an S Corporation, because it gives the owners the benefits of both worlds; the tax benefits of a partnership while still reducing the self-employment tax on net earnings. The type of entity you choose depends on your business goals. To learn what is best for you, contact an experienced legal tax professional.


If you have questions about the tax implications of certain business structures, let the professionals at Nielsen Law Group help you today. Call (480) 888-7111 or submit a web request here. We work with you for satisfactory and timely results.

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