Business Structure and Tax Issues for SOHO’s
As a business owner, you must understand the basics of the American tax system or you might run into trouble with the Internal Revenue Service (IRS). If you don’t understand how your taxes should be paid, it would be a good idea to consult a tax accountant that knows the IRS laws concerning payment of taxes and shelters. Tax accountants can also tell you what can or cannot be deducted.
The tax code differs according to the type of structure that you have determined your business to be. There are several structures that will determine how your taxes are handled. Those structures are Sole Proprietorship, Limited Liability Partnerships, S and C Corporations and Limited Liability Corporation.
Sole Proprietorship – This is probably the oldest form of business ownership dating back to pre-historic man and it’s a simple one. There are no partners, investors or stockholders. It’s just a person running and owning their business with the all the responsibility and liability in their hands.
The business stops when the sole proprietor dies. That’s it unless he or she has in their will that a certain person can come along and run the business assuming the assets and liabilities. Sole proprietors usually pay higher taxes than the other business structures that are discussed here.
Limited Liability Partnership - A Limited Liability Partnership is just what it says. It has the formation of a basic partnership agreement, kind of like a handshake on paper but the difference is that the LLP can be responsible for the debts ran up within the business and the partners not be held accountable. The tax liability is different in an LLP and the partners have a right to manage the business directly.
S or C- Corporations - The difference between S and corporation is that a C corporation is taxed by Federal Corporate Income tax standards. The amount of shareholders you can have in an S corporation is unlimited and you can have foreign shareholders having stock within the corporation.
An S-Corporation is not taxed by the Federal Corporate Income tax standards.S Corporations are taxed according gto the rules and regulations in Subchapter S of the Internal Revenue Code. An S-Corporation pays no corporate income tax on any profits that the company makes and the shareholders bear the brunt of paying taxes on their shares. Taxes are still paid whether the shareholders or S-corporation is making money or not.
Limited Liability Corporation – This is the newest form of corporation to come along within the past fifteen to twenty years and this is what the majority of SOHO owners and business people set their business structure with. The Limited Liability Corporation is a hybrid structure that has the flexibility of a sole proprietorship and the management of a partnership.
A manager or owner in a limited liability corporation as treated as the entity and a limited liability corporation with multiple managers is treated the same way as as Limited Liability Partnership.
A Limited Liabilitity Corporation can defeat the concept of double taxation for your business.
These are the structures that you should study and incorporate into your SOHO strategic plan.
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