Choosing the right type of entity for your business is crucial because it can impact your tax planning strategy. There are four major types of entities to choose from – sole proprietorship, partnership, corporations, and limited liability companies. Each of these entities has different advantages, disadvantages, and rules to help you decide which entity is right for your business.
As a sole proprietor, your business income, gains, deductions, and losses are to be reported on Schedule C of Form 1040. There is no corporate income tax for a sole proprietor.
Partnerships are best for companies with two or more owners and are in accordance with the state statutes they are created in. For tax purposes, a partnership is its own entity. A partnership is not subject to federal income tax, but the finances are reported to a partner’s individual federal income tax return.
Corporations can have a few more benefits from sole proprietorship and partnership, but they also have some disadvantages. A major advantage is that individuals are not liable and it is easier for raising money. These can have tax implications as the individual isn’t taxed, but rather the corporation is.
A Limited Liability Company, also known as LLC, is similar to a corporation as it provides limitations for the individuals. LLCs have similar tax treatment to partnerships.
