Small Business Tax FAQs

How should I structure my business?

Business formation, or choosing the type of legal structure, is something every business owner must carefully consider. Your business organization can affect things like how much taxes you pay and how often, personal liability, and ability to take out loans. The state in which you have your business controls business formation.

The most common forms of business:

  • Sole Proprietorships
  • Partnerships
  • Corporations
  • S Corporations
  • Limited Liability Company (LLC)

Our Business Formation Services will help you determine the right fit for you.

What is a Partnership?

A partnership is an agreement between two or more business owners that are invested in the company and agree to share in profits and losses. There are different types of partnerships and levels of liability, so be sure to choose what is right for you and your partner(s). While a partnership doesn’t pay income tax as an entity, the individual partners receive a K-1 showing their share of the income, credits, and deductions. They are each responsible for reporting his or her share of the net profit or loss on his personal 1040 return. The organization is responsible for business taxes (Form 1065) and must be registered through the state.

What is a C Corporation?

A C corporation is legally separate from the owners, considered as a “legal person” by law, and limits personal liability for its shareholders (with exceptions for certain conduct). When you incorporate a business, you enter the world of stocks, where shares can be bought and sold. Corporations are the best business formation if your goal is to be a publicly traded company. Corporations must pay taxes on profits, and its shareholders are also taxed individually on dividends (profit distribution).

What is a Limited Liability Company (LLC)?

An LLC is unincorporated but still enjoys limited liability. Like a partnership, an LLC has “pass-through” taxation and better for companies with one owner. Depending on how the LLC is structured and the number of owners, the LLC may be recognized as a partnership or a disregarded entity (taxed similarly to a sole proprietorship).

What is a Sole Proprietorship?

A sole proprietorship is the most common type of business formation. It is defined as an unincorporated business of any kind that is owned by one person, with or without employees. Whereas it offers the owner the most control over business affairs, she is personally liable for financial obligations and debts. In most cases, sole proprietorships are responsible for filing quarterly estimated tax payments.

What is an S Corporation?

An S corporation, or “small business corporation” is similar to a C corporation, but with a different taxing structure under the IRS. S corporations have “pass-through” taxation – where profit/loss is reported at an individual level, avoiding double taxations of C corporations. Small business owners may choose to be S corporation to have similar tax benefits of a partnership without the tax preparation expense and complexity of a partnership tax return.

Do I need an Employee Identification Number (EIN)?

Also known as a Federal Tax Identification Number, an EIN is how your business is identified. Before getting an EIN, you need to have a business formation. You can apply for an EIN for free through the IRS. According to the IRS, you will need an EIN if:

  • You have employees
  • You operate as a corporation or partnership
  • You file Employment, Excise or Alcohol, Tobacco, and Firearms tax returns
  • You withhold taxes on income, other than wages, paid to a non-resident alien
  • You have a Keogh plan (a tax-deferred retirement pension plan, typically for available to self-employed individuals or unincorporated businesses)
  • You are involved in organizations such as:
    • Trusts (with some exceptions)
    • Estates
    • Real estate mortgage investment conduits
    • Non-profits
    • Farmers’ cooperatives
    • Plan administrators
I own a business with my spouse -- how is that defined?

You may be treated as a qualified joint venture if:

  • You own a business with your spouse
  • You split the business 50/50
  • You are unincorporated
  • You’re not considered a formal business partnership
  • You file jointly with your spouse on your taxes

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