Tax Prep 101: Organizational Strategies for Tax Day

  • Sole proprietorships are the simplest way to structure a business, common for small businesses and startups, where you, or you and a partner(s), have complete control of the business. 
  • Tax Implications: In a sole proprietorship, there isn’t a distinction made between personal and business finances. This implies your personal assets are liable for any business-related debts and obligations. Business income or losses are reported on your individual tax return, which means you’re also subject to self-employment taxes. Depending on your business model and your state of residence, you may be obligated to pay extra taxes.
  • This structure shields all partners from personal liability regarding the business’s debts or errors made by fellow partners. LLPs typically adhere to state regulations dictating ownership eligibility, often restricted to licensed professionals like attorneys, accountants, or physicians. 
  • Tax implications. Every partner within an LLP is responsible for reporting their portion of the business’s profits or losses on their individual tax return and is subject to self-employment taxes.
  • This setup maintains a distinction between business and personal finances, safeguarding the member’s assets from the business’s debts and responsibilities. The creation of an LLC is regulated by state laws, which outline its specific requirements and procedures. 
  • Tax implications. An LLC offers greater tax flexibility compared to alternative structures. You have the option to designate the LLC for taxation as a partnership, a corporation (refer to “Corporations” below), or integrate it into your personal tax return, termed a “disregarded entity”. Additionally, you can modify the LLC’s tax classification as your business evolves, such as during periods of increased value or alterations in leadership structures.
  • There are two main types: a C-corp (named for being in subchapter “C” of the Internal Revenue Code) or an S-corp (the “S” similarly stands for subchapter “S”).
  • Tax implications.  C-corps face double taxation on their profits, as they are subject to corporate income tax upon profitability, with shareholders also taxed on dividends received. Despite this, C-corps offer extensive flexibility in ownership arrangements, including foreign ownership, profit allocation, and business expansion. In contrast, S-corps bypass double taxation as owners report business profits or losses on their personal tax returns, similar to sole proprietorships, LLCs, and LLPs, yet this structure entails stricter limitations on ownership and expansion
  • The general partner generally has unlimited liability for the obligations of the partnership, while the limited partner(s) have limited liability.
  • Tax implications. The partnership files an annual information return using IRS Form 1065, and each partner receives a Schedule K-1 detailing their share of the partnership’s income, losses, and other items such as credits and deductions. Subsequently, each limited partner reports this information on their individual U.S. federal income return. 
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