Tax Considerations by Business Types

When you are setting up your eCommerce business or regular business, one of the most crucial parts is choosing a legal entity in which you are going to operate. With the fast growth of your business, you will need to change forms for accommodating more owners, a various capital structure, or protect your wealth from liability. Here comes the most important piece of the puzzle: you have to be sure that the tax consideration is associated with the business type you have chosen.

Choosing an Incorporation Type

There are several choices when it comes to incorporating a business, such as:

• Sole Proprietorship
• General Partnership
• LLC
• C Corporation
• S Corporation

We already talk about LLCs, S Corps, and C Corps in detail here.

Let’s consider each of them separately from the tax consideration point of view:

Sole Proprietorship Tax Considerations

Here, both the business and the owner are legally the same. According to IRS’s, the business is not a taxable entity; however, all the business assets, liabilities, and income are treated as belonging to the owner of a business.

General Partnership Tax Considerations

In this type, both the business and the owners are legally the same as well. However, a partnership is not a taxable entity under federal law; also, there is no individual partnership income tax, as there is a corporate income tax.

Alternatively, income from the partnership is being taxed to the individual partners at their own personal tax rates. All of the income of the partnership has to be reported as distributed to the partners, who are in their turn to be taxed on it through their individual returns.

Limited Liability Company (LLC) Tax Considerations

LLC is a separate legal entity that is created by a state filing. The owners of an LLC are provided with liability protection. Since an LLC is passing through taxation, there is no tax on the LLC’s income at the business level. Both income and loss are reported on the personal tax returns of the shareholders, and any tax due is being paid at the personal level. However, keep in mind that even if the LLCs are treated as a partnership for federal tax purposes, it will not work for state tax purposes. You can read more about LLCs here.

C Corporation Tax Considerations

The C Corporation is a separate legal entity created by a state filing. This type of entity is subject to corporate income tax. As a rule, the income is being taxed at the corporate level by using corporate income tax rates. C Corporation’s income is also under double taxation. The first tax is paid by the corporation on its income, then again by the owners on the dividends received. In that case, if the owner gets a salary from the corporation, it is also subjected to income tax.

S Corporation Tax Considerations

The S Corp has filed a special election with the IRS in order to be treated like a partnership for tax purposes. That’s why S Corps are not subject to corporate income tax; however, the income is passing through taxation, where both the income and loss of the business is passing through the company to the shareholders. It means that in S Corps, income is not subjected to double taxation.

As you can see, there are various income tax consequences that flow from each of these types. If you have more questions regarding this, our Prestige Auditors team will help you in making the best choice for the successful operation and growth of your business, whether it’s an eCommerce business, or a physical one.