What Entity Should You Use for Your Business? Part 1 of 2
“Definiteness of purpose is the starting point of all achievement.” – W. Clement Stone
Author: Janet I. Behm, EA, Nate Hagerty
Revised from a November 22, 2021 blog post: Which Entity Type is Best for Your Business? by TaxProMarketer
AI assistance:
Editing: Grammarly
Research: MS Copilot
A 2-minute read:
The classification and type of business you have is an “entity.” Each business entity has its own tax treatment, offering potential benefits that can be advantageous to your business.
Understanding the tax implications of different business entities, such as partnerships, LLCs, and S-Corporations, can empower you to make informed decisions and potentially claim a 20% tax deduction on your Qualified Business Income (QBI) under OB3—The One Big Beautiful Bill Act.
These potential tax benefits are just one example of how the proper business structure can positively impact your tax life, providing reassurance and confidence in your business entity choice.
Here are some of the most common entities and their good and bad points, along with some very basic tax info:
Sole proprietorship: the simplest business structure. It’s just you. You get all the profits, take all the chances, and take all the hits.
You pay your regular income tax on the profits, but you also have to pay self-employment taxes. Paying every quarter is an excellent idea, no matter what business entity you have, to stay on the taxman’s good side.
Disqualified LLC: A “Limited Liability Company” (LLC). This is easier to start and run than a corporation. It provides owners and their personal assets (your bank account, car, home) with “Limited Liability” from problems the company might get into. Profits or losses pass through to your personal tax return using a federal Schedule C.
Partnership: This is a bit more formal than just a few sole proprietorships glued together--two or more individuals-- to share expenses, especially when you’re talking about taxes.
You have to get an employer identification number from the IRS (Form: EIN) and register for all state taxes (think “sales tax”). You file a federal Form 1065 “information return” to report the income, deductions, gains, losses, and so on.
You also have to think about excise taxes, property taxes, and employment taxes; these tend to pop up no matter the business entity you use.
Bottom Line
You pay income tax as an individual since the money the company makes (or loses) “passes through” to the partners. Your business doesn’t get taxed separately.
Next week’s blog. We will cover LLCs in more depth and take a look at incorporating as an S-Corporation or even a C-Corporation to take advantage of the tax-saving benefits they offer in a comprehensive tax strategy.
Warmly Janet, the Tax Wizard
Disclaimer: This blog post is for informational and entertainment purposes only. It does not constitute legal, financial, or tax advice. Please consult a qualified professional for advice specific to your situation.
SPECIAL EXTRA CREDIT FOR TAX NERDS:
Our Friend and Colleague,
Tom Gorczynski
https://www.tomtalkstaxes.com/p/ob3-act-business-expensing-enhanced
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