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Are the Various Business Structures Taxed Differently?

Owning a business has long been considered part of the “American Dream.” If you are planning to start your own small business you will soon need to make a seemingly endless number of decisions relating to the business. One of the most important of those decisions is what type of business structure to choose for your new business. Choosing which type of legal entity you plan to use for your company is a huge decision. One common question new entrepreneurs frequently have is “Are the various business structures taxed differently?” The simple answer is “yes.” In fact, your choice of business structure will impact everything from management of the company to taxation to personal liability.

Business structures fall into three broad categories – sole proprietorship, partnership, or corporation. Within those broad categories, however, there are a number of sub-categories and hybrids. Understanding how some common business structures are taxed is a crucial step in deciding which type of entity is best for your business.

A sole proprietorship is the simplest to define and explain. A sole proprietorship is simply an individual who is in business for himself/herself. No legal documents are required to become a sole proprietorship. A business run as a sole proprietorship is taxed at the personal income level. All income (and losses) is declared on the owner’s individual income tax return.

A partnership is equally simple to define; although, a partnership can be more complex if the partners choose to make it so. A partnership is two or more parties working together and sharing in the profits. A partnership is not subject to taxation, though a partnership tax return is often required to be filed. Instead, profits and losses “pass through” to the partners and are reported on the partners’ individual income tax returns.

Finally, a corporation is the most complicated of the potential business structures. Several legal documents must be prepared and executed to form a corporation. A traditional C corporation is then taxed at the corporate level as a separate entity. Profits and losses are also taxed at the individual shareholder level as dividends or distributions. This “double taxation” is one reason why many small business owners shy away from forming a corporation. One solution is to convert a traditional C corporation into an S corporation if possible. An S corporation combines many of the liability advantages of a traditional corporation with the taxation benefits of a partnership or sole proprietorship.

Given the importance of choosing the best business structure for your new endeavor it only makes sense to sit down and discuss the options with an experienced Conshohocken, Pennsylvania business law attorney as soon as possible to ensure that you understand the advantages and disadvantages of each option. Contact the business law attorneys at Curley & Rothman, LLC by calling 610-834-8819 today to schedule your free consultation.