When you start a business, there are endless decisions to make. One of the most important is how to structure your business. Why is it so significant? Because the structure you choose will affect how your business is taxed and the degree to which you (and other owners) can be held personally liable.
Our Los Angeles CPA firm can assist you with business start-up, incorporation, and entity selection services. Leon Jaferian, CPA, Inc. has the experience to help advise and guide you in choosing the best business entity to meet your short and long-term goals.
Here’s an overview of the various business structures
This is a popular structure for single-owner businesses. No separate business entity is formed, although the business may have a name (often referred to as a DBA, short for “doing business as”). A sole proprietorship does not limit liability, but insurance may be purchased.
You report your business income and expenses on Schedule C, an attachment to your personal income-tax return (Form 1040). Net earnings the business generates are subject to both self-employment taxes and income taxes. Sole proprietors may have employees but don’t take paychecks themselves.
If you want protection for your personal assets in the event your business is sued, you might prefer a limited liability company (LLC). An LLC is a separate legal entity that can have one or more owners (called “members”). Usually, income is taxed to the owners individually, and earnings are subject to self-employment taxes.
Note: It’s not unusual for lenders to require a small LLC’s owners to personally guarantee any business loans.
A corporation is a separate legal entity that can transact business in its own name and files corporate income-tax returns. Like an LLC, a corporation can have one or more owners (shareholders). Shareholders generally are protected from personal liability but can be held responsible for repaying any business debts they’ve personally guaranteed.
If you make a “Subchapter S” election, shareholders will be taxed individually on their share of corporate income. This structure generally avoids federal income taxes at the corporate level.
In certain respects, a partnership is similar to an LLC or an S corp. However, partnerships must have at least one general partner who is personally liable for the partnership’s debts and obligations. Profits and losses are divided among the partners and taxed to them individually.
For more help with individual or business taxes, connect with us today and learn about our Los Angeles incorporation services. You can call us today at 818-404-1084 or request a free consultation online.