Starting a business is an exciting, daunting task. What begins as your vision for a company soon becomes a reality. However, that reality requires significant decisions that have unseen consequences.
Determining business owner responsibilities
An essential step of any business is registering it with the state of New York as well as federal agencies. You will have to choose a specific business structure to determine how your company is organized – and who is responsible should tax issues or debts accrue.
The IRS allows for many business structures. Knowing which one is right for you takes careful consideration and should be discussed with an attorney who understands tax law. It will help your future if you carefully consider the following setups:
- One owner is responsible. In a sole proprietorship or a Limited Liability Company (LLC) only one person is liable to pay taxes and reconcile any debts.
- Many owners or members are responsible. A partnership or LLC allows for multiple people to be accountable for taxes and debts.
- You make profits but are not liable. In a C corporation, a business owner is not personally on the hook for debts. Instead, shareholders own percentages of the company and are paid profits based on their percentage. Taxes are handled at the corporate level as well as when the profits are individually distributed to shareholders. Debts are handled by bankruptcy or dissolution of the company.
- You and a limited number of people make profits but are not liable. An S corporation is structured just like the C corporation mentioned above. However, the number of shareholders is limited to only 100 people.
How taxes differ for each business structure
If you form a sole proprietorship or LLC, you are personally taxed for your business profits. If you have partners or members, they are also taxed on the profits. This is known as single taxation. It can save you money by paying out to taxes just once.+
If you form a C or S corporation, then the profits are taxed twice. The IRS taxes both:
- The business and its profits as an entity
- The profits when they are distributed to its shareholders
This process, known as double taxation, is often a significant drawback to choosing a corporate structure. However, some profits can be allowed to stay in the company for future growth, and these structures protect you from company debts.
Which business structure is right for you?
Small businesses may want to consider a sole proprietorship, partnership or LLC. Business with under 100 shareholders would likely save on taxes with an S corporation. These structures are all known as “pass-through” entities because the profits pass through the business to its owners. The owners simply pay income tax on their personal tax returns.
If you are planning for a large business with over 100 shareholders, then a C corporation may be the only option available to you.
Consider carefully before you decide
There are pros and cons to any company structure. For example, contributions to social security and Medicare can be very high for sole proprietorships or partnership structures – you may end up losing the money you planned to save in single taxation.
The tax law attorneys at Goldburd McCone, LLP can discuss your business formation plans and advise on how to save on taxation. Contact us to learn more about services.