Managing Attorney
The business entity you choose for your enterprise determines its tax obligations. No two business entities have exactly the same structure and tax rates. If you aren’t sure which entity is best for your business, consult with our Houston corporate attorneys for guidance. This is a very basic version of the tax implications of varying types of entities.
Choose the Right Business Structure
The business structure you select for your product or service has distinct tax and legal ramifications. As an example, sole proprietorships are one of the most common business structures. Sole proprietors are individuals who own a business that is not incorporated. This simple business entity makes no distinction between the assets of the owner and the business, meaning his or her personal assets are put at risk in the event of a lawsuit.
Sole proprietorships are pass-through entities. The business is not required to pay taxes. Rather, taxes pass on through directly to the owner of the business. Moreover, pass-through business entities do not have to pay corporate income taxes. Instead, the business owner pays taxes using his or her personal tax return in accordance with regular income tax rates.
Limited Liability Companies
Also referred to as LLCs, limited liability companies are unique business structures that place all legal liability on the business as opposed to the owner. In terms of taxes, an LLC has the ability to be taxed as a corporation, a partnership, an S-corp, or disregarded and as a component of the LLC owner’s tax returns. Though the business owner’s personal assets are not on the line in the event of a lawsuit, taxes must be paid. The creation of LLCs through state statute provides federal tax flexibility.
LLCs that have been elected to be taxed as a C-corporation or sole proprietorships on the federal level typically face a federal tax filing/payment due date of April 15. If the LLC is taxed similarly to an S-corporation or a business partnership, its federal tax filing is March 15 with a payment due at the same time as the individual income tax return.
Business Partnership
Business partnerships are relationships between two to several individuals who combine efforts to conduct business. General partnerships, limited liability partnerships, and limited partnerships are three distinct classifications.
Similar to sole proprietorships, business partnerships are pass-through entities in the context of taxation. Choose the partnership entity and your tax return will be due on March 15 though taxes are not officially due until the traditional April deadline as that is the date when the pass-through to one’s personal tax return occurs.
Corporations
Corporations are a business entity formed by a group of people that come together to function as a single legal entity. The company is completely separate from its ownership, meaning the company pays its own taxes on the net income that it produces. The famous Buckley v. Valeo ruling from 1976 determined corporations are entitled to free speech.
In terms of taxes, C-corporations are taxed two times at both the personal and corporate income levels as they are not pass-through entities. The corporation will pay tax on its net income, and to the extent it pays dividends to the shareholders, the shareholders will pay tax on those dividends. In contrast, S-corporations are pass-through entities that sidestep double taxation.
A business must meet strict IRS standards to become an S-corporation. As an example, S-corporations must be citizens of the United States and must also have less than 100 shareholders and other entities may not own an interest in an S-corporation.
Learn More During a Consultation With Our Houston Corporate Attorneys
The optimal business structure for your enterprise hinges on your long-term aims, plans for hiring, and desired balance between legal risk and taxes. Our Houston corporate attorneys can help you choose the best entity for your business. Reach out to us today to schedule a consultation.