If your business is growing and you are not sure how to structure its tax returns, you need to determine which business entity is best for you. Corporations and LLCs both have their advantages and disadvantages, and you should choose the one that is right for your business and your tax strategy. The tax treatment of business income will also be an important consideration, and you need to know how to make the best choice for your business.
Typically, a business entity will be a corporation, limited liability company, or sole proprietorship. Each entity will have its own specific characteristics and requirements, but all four types cover most businesses. For example, a limited liability company is a personal account with limited liability, and a corporation is a professional entity with a board of directors, employees, and shareholders. There are additional entity types that can be used for tax purposes, but these four types are most common and can be found in most business situations.
A business entity has its own accounting records. A separate accounting file will make it easier to compare finances between businesses and compare profitability. A business entity can also be more easily audited. For instance, if Bob decides to purchase a pizza shop next door, he should separate his accounting for each business. This way, he can compare each business’s profitability to other businesses.
When choosing a business entity, you should consider the legal protection, tax treatment, and paperwork requirements. Sole proprietorships and general partnerships are perfect for “starter” businesses, but if your business is growing, you should consider an LLC or a corporation. You should weigh the advantages and disadvantages of each type and consult with a business lawyer and accountant for specific advice.
Corporations are the oldest form of business entity and are the preferred choice for publicly traded businesses. Although this is a major benefit, it is not the only factor that drives the preference for corporations. Corporations must pay entity level taxes, while S Corporations offer some tax pass-through benefits. As a result, the most common business entity is the C Corporation.
Besides the shareholders, a business entity has several other stakeholders. Its ownership interests include owners, directors, and unrelated owners. The ownership interests of these individuals must be tracked. The directors and officers are the representatives of the owners and managers. They have job titles and terms of service. This information is vital for a company’s legal structure.
Before registering a business entity, be aware of the filing fees and renewal fees. Fees vary between jurisdictions. Some jurisdictions require a registered agent and an office address. In addition, some require annual renewals, but there are a number of exceptions.