Starting your own business is an exciting experience. You’re following your dreams and stoking the fires of your passion. That doesn’t mean it won’t be work, though. A lot goes into starting a new venture, and entrepreneurship involves a great deal of time and effort.
One of the most important decisions you’ll make during the process is which kind of entity your business will be. This structure has a huge impact on your company, ranging from the way it is taxed to whether or not it can be publicly traded.
Let’s take a look at the various entities available and see what they could mean for your business.
Sole Proprietors and Partnerships
Like LLCs and S-corporations, sole proprietors and partnerships are considered “pass-through” entities. This means that the business is not considered legally distinct from the owner, and all taxes on profits are paid directly on the owner’s tax return.
These are simpler structures, generally used by entrepreneurs who provide specific services, such as landscaping, event coordinating, and even art. Essentially, as a sole proprietor or partnership, you are your business.
LLCs and S-Corporations
As pass-through entities, limited liability companies and S-corporations are taxed through the owners’ personal tax return. Unlike sole proprietors and partnerships, however, these structures enjoy liability protections that keep you and your partners insulated from debts your business accrues.
C-corporations are the preferred structure for bigger businesses and are considered their own distinct legal entity. This provides owners with the same liability protections as LLCs and S-corps, but also creates what some consider “double taxation.”
The company itself is taxed based on income and profits, while distributions and income paid to stock and shareholders are taxed again on the individuals’ personal returns. However, this allows the company to be publicly traded, opening new avenues for incoming revenue.
Whichever entity type you choose, you need your accounts in order if your business is going to thrive. PADGETT BUSINESS SERVICES® is a Farmington-based professional tax and accounting firm. Contact our office today to schedule a consultation with our expert Enrolled Agent.