Choosing a Business Form and Business Taxation
Business Lawyer Washington DC
If you are operating a small business or starting a business, it is important to be familiar with the different types of taxes for which you will be responsible. Sole proprietorships, partnerships, and LLCs are all taxed differently, and choosing a specific business form means distinct tax obligations.
At Brown Kiely LLP, we have a thorough understanding of how tax obligations can greatly impact the health of a company. For this reason, it’s important to be proactive when deciding how to set up a business and what structure to choose upon forming the company. Taxation should not be the sole deciding factor on the legal business structure, but should be taken into consideration when determining the business type. Listed below are three different company structures and the pros and cons of tax obligations associated with each.
Sole Proprietorship
A sole proprietorship is one of the simplest business structures. There are no fees to pay to set up a partnership as you are the sole owner of the business. A business lawyer in Washington DC can meet with you to discuss this type of business structure with you in more depth. The benefits of having a sole proprietorship from a tax standpoint includes these points:
- It is easy to set up.
- There is no double taxation, which means that the business cannot be taxed twice on the same source of income regarding income taxes that must be paid.
- The income of the sole proprietorship is reported on the business owner’s personal income tax return.
The simplicity of a sole proprietorship is its main advantage, but with pros come cons. Some of the disadvantages of having a sole proprietorship include:
- Personal liability for taxes. This means there is no protection against personal limited liability.
- You pay twice the amount of Social Security and Medicare taxes as compared to your employees.
- There is no life insurance tax deduction and only a partial health insurance tax deduction.
Partnership
There are different types of partnerships you might want to consider such as a general partnership or a limited partnership. Both kinds of partnerships have their advantages and disadvantages, depending on the nature of your business. However, both are usually taxed the same. Because there are exceptions, it’s important to consult a business lawyer in Washington DC from our firm before forming your business. Some of the advantages regarding taxation in a partnership includes:
- There is no double taxation, as stated above this means that you cannot be taxed twice on the same source of income.
- The partners that report income on their personal tax returns are taxed proportionately according to their respective incomes.
One of the disadvantages of having a partnership is that there is no protection of personal limited liability unless there is a limited partnership. This means that the limited partner only has a limited liability, but all other partners in the business are liable for any taxes or debts of the company. A Washington DC business lawyer from Brown Kiely LLP can help you determine how the financial health of your company can be affected by this tax structure.
Limited Liability Company (LLC)
Becoming a limited liability company can be more costly and complex to maintain than a partnership or a sole proprietorship, but the ends may justify the means for your small business. Some of the advantages of creating a limited liability company regarding taxes include:
- There is no double taxation.
- Members are protected against personal limited liability.
- There can be over seventy-five members in an LLC.
- A limited liability company can choose whether they wish to be treated as a sole proprietorship, partnership, or corporation when reporting to the IRS.
The disadvantages of having a limited liability company include:
- Members are subject to taxes for Medicare and Social Security.
- Limited liability companies are somewhat new to the business world, and so the laws regarding taxation on LLCs may change over time.
Contact Brown Kiely LLP
If you are starting a company and would like more information regarding business forms or taxation, call us. A business lawyer Washington DC respects can be a strong advocate for your company. Our team of business lawyers have a depth of knowledge about tax laws and how they affect small businesses. We will be pleased to assist you in making the best decisions for the success of your business.