Entrepreneurship is a lucrative career that can come with tax benefits.
Many entrepreneurs wonder as to whether it is worth incorporating their small businesses or not. On one hand, incorporation allows small business owners to receive some tax benefits and avoid higher taxes, but on the other hand, it comes with its own set of paperwork and tax system compliance requirements.
People with their own startups, most often form a corporation or a limited liability company (LLC) to lessen the amount of taxes they have to pay. But how do you know if one option is better for you than the other?
In this article, you'll learn all about different types of corporations and LLCs before deciding with one will serve your business best when it comes to any tax benefit.
This blog will look at whether a corporation reduces its taxes.
A sole proprietorship is an individual business entity. It is the most common business entity for entrepreneurs and the owner of the business does not need to be a natural person.
In a sole proprietorship, the business is owned by one person and is not limited in any way. The owner of the business is personally responsible for any business liabilities, including taxes on their net income.
A partnership is an entity that has two or more people who share in the profits and losses of the business. A partnership is not taxed, and it does not have to file tax returns. Partners may be equal or unequal in their share of the profits.
Corporations vs. Limited Liability Companies
What Is a Corporation?
A corporation is a legal entity that's wholly separate from its stakeholders. C-corporations are taxed as a separate entity from shareholders personal income.
In the United States, the branch of tax law that deals with corporations is called Subchapter-S corporation law.
Basically, it means that that those who form a C corporation must count wages as corporate income and must pay the corporate income tax rate on them as well
Tax rates vary depending on the type of business and where it's located. For example, the standard corporate tax rate on corporate profits in the United States is 35% in 2018.
The structure of a corporation is simple: one class of stock that represents the ownership interests of the corporation and another class of stock that represents the ownership interests of the shareholders.
The corporation is required to pay dividends to its shareholders and pay taxes on any profits.
An S corporation is a business entity that's similar to a C corporation. The main difference is that do file corporate tax returns but S corporations are taxed like a corporation, but they're taxed at a lower rate of 15%.
Often times when you elect to be taxed as an S corporation, you may still have to pay self-employment taxes.
An LLC is a type of business entity that's similar to a corporation. LLCs are taxed at a special tax rate of 15% instead of the standard corporate tax rate of 35%.
Many people believe that C corporations are only for large corporations but there is no minimum size requirement for a C or S corporation.
How do you form a corporation?
An LLC can be formed with a few simple steps. First, the business owner must register with the state of business to be formed and file a document with the Secretary of State's office that states the name of the LLC.
You may be concerned about the taxes you would have to pay if you formed a corporation. However, you may be able to reduce your federal taxes and local taxes by forming a corporation and reduce your overall tax liability.
Here's how: By using a corporation, you can isolate your personal assets from your business assets, so that if there is any litigation or bankruptcy, your personal assets are not at risk.