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| Randy Elder highlighted in an article published by MyBusinessMag.com below: MyBusiness Manual
February/March
2004 A Road Less Taxed Here’s a rundown of the most common business structures, and the ways in which taxes generally are calculated under each. Sole Proprietorship: A sole proprietorship doesn’t pay taxes itself. Instead, income flows to the owner’s personal tax return, and the owner pays taxes at his personal tax rate. An individual with a sole proprietor also pays a self-employment tax on the business’s net profit, which replaces the payroll taxes that an employee and his employer would pay. Currently, the self-employment tax is about 15.3 percent of income. Partnership: Income from a partnership flows through to the partners’ individual tax returns, and each partner pays income tax according to his personal tax rate. Partners also are responsible for self-employment tax. LLC: An LLC, or Limited Liability Corporation, isn’t actually a tax designation. Instead, it’s a form of business in the eyes of the law that provides some protection from creditors. “With an LLC, you have several choices of tax entity,” says Randy Elder, a Phoenix-based CPA. “You can be a partnership, a corporation or a sole proprietorship, depending on how many people are involved.” An LLC that’s taxed as a partnership or a sole proprietorship, for instance, will have profits flow through to its owners. S Corporation: In an S Corporation, the shareholders may draw a salary from the corporation. Income remaining in the business can pass to the owners as a distribution and is not subject to self-employment tax. As a result, S Corporations can provide tax savings. Michael Hadley, chief executive officer with iCorps Technologies Inc., chose an S Corp election. “Taxes didn’t drive us to do this — it was the liability protection,” says Hadley, whose company offers IT outsourcing. “But as you grow the company, taxes play a huge part.” Hadley estimates that iCorps’ tax bill might double if it were to convert to a C Corporation. A cautionary note: The IRS looks closely at the split between wages and distributions in S Corporations. It doesn’t want business owners to classify excessive portions of income as distributions to reduce their self-employment taxes. If you choose an S Corp designation, talk with a tax professional and come up with a reasonable split between wages and distributions. C Corporation: From a tax standpoint, C Corporations have some disadvantages. For starters, income is taxed twice: The company pays tax on any income earned, and owners pay taxes on dividends they receive. In addition, owners can’t use losses incurred by C Corporations to offset other income. Instead, the income or loss stays at the corporate level. But if you contemplate taking on outside investors some day, a C Corporation may be the way to go. Remember, regulations governing corporate entities differ by state. Work with a tax professional to determine what will make the most sense for you. And when it comes to choosing a business structure, tax considerations won’t always trump others, such as reducing your liability as an owner. “Taxes are important, but they’re not always the tail that wags the dog,” says Cameron Hess, principal and CPA with the Sacramento-based law firm of Wagner, Kirkman, Blaine & Youmans. Find more tax tips in the "Taxes" section of http://www.NFIB.com/toolsandtips. To see actual article please click on link:
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