Choosing the legal structure of your business can be incredibly challenging, as there are pros and cons of each structure. While some of the differences will primarily impact how you run things behind the scenes, there are many tax implications associated with all of the formats. At MKS&H we can guide you through the process of tax filing based on the legal structure of your business.
A partnership is typically used when businesses are owned and operated by more than one individual. Depending on your preferred legal structure of your business, you can choose a general partnership where all partners share responsibility or a limited partnership where some participants are only investors and not involved in day-to-day activities. In terms of taxes, you will benefit from pass through laws that allow your business to avoid paying taxes on income. All profits and losses will instead pass through the partners.
These are very easy to form when you’re a single owner, and you won’t need to worry about negotiating or working with others when you iron out the legal structure of your business. Sole proprietorships are also taxed on a personal level and have the more favorable tax rates of all business structures.
Many businesses want to avoid any personal liability, which makes the corporation structure preferable. The debt of the corporation is not directly tied to you, but the legal structure of your business will take more money and time to formalize. Tax-wise, you will need to pay corporate income tax at the federal and state levels and take care of personal taxes for yourself.
This structure is a great compromise between being a single operator and having the protection that is afforded to corporations. When you have an S corporation, you will only be responsible for taxes as you do your personal tax return. An S corporation can be more complex to organize, so you should take care to make sure you know your responsibilities.
Limited Liability Company
Finally, one of the other ways that you can organize the legal structure of the business is an LLC. LLCs protect you from liability but allow you to pass profits and losses through your own tax return. This is a popular structure, but you should always do your research to ensure you understand your obligations, like self-employment tax.
Master the Tax Filing Process with Help from MKS&H
MKS&H provides tax and accounting services to businesses of every size and in every industry. We can work with you to make taxes easily and avoid the most common mistakes. Contact us today for a consultation.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture, and your business goals. This approach enables our clients to achieve their greatest potential.