Monday, November 30, 2020
Home Business Taxes Types of Business Structures: Small Business Structure Tax Breaks!

Types of Business Structures: Small Business Structure Tax Breaks!

When you start a small business, it is important to structure it in such a way that you can get the maximum tax benefits, making it possible to gain a noticeable difference in your profits.

Here are some business structures you should consider if you are thinking of changing over from a sole proprietorship or a partnership:

C-Corporation

Most of the big names of the business world employ this type of business structure. This might not be suitable for your small business because not only will you be paying corporate tax, which is quite high, but you will also be paying individual tax on whatever money you withdraw from the company – such as your salary.

However, this kind of corporation allows you to receive capital funds from the public by issuing shares in the market. Use this business structure only if you are ready to take a huge risk to attain success.

However, in this structure you can pay half of the self-employment tax and the other half will be paid by your corporation – as opposed to the full amount you would have to pay as an S-Corporation, defined below.

S-Corporation

This option gives you all the benefits of a C-Corporation, and you might also be exempted from corporate tax depending on the state in which you are registered. The downside is that you will have to pay the full self-employment tax.

You might only have to pay taxes on your salary and other earnings from your corporation, which solves the problem of double taxation.

Before deciding on the type of structure you want for your business, study the savings you could make from capital-gains tax, dividends, salaries, payment of various insurance policies, and repayment of loans.

Forming a corporation can help if you decide to sell your business. All you need to do is sell your stake in the business to another stockholder. This way, you are personally separated from your business and your business can continue even after you have retired.

The downside to transforming your business structure is that you will have to maintain more documentation – and you will also have to pay higher fees to accountants since your accounts will have to be audited at years’ end.

You will also have to keep a record of your annual meetings, and you can expect that the paperwork required will increase.

Limited Liability Company [LLC]

This structure is much more suited for small businesses, since it allows you to function like a proprietorship or a small partnership, but without the risk of having your personal assets attached if someone decides to sue you.

The same applies to any other form of corporation, but LLCs also have a lower income tax bracket than C-Corporations and thus may be a better choice for your small business.

So, with the government offering more tax breaks to corporations, especially S-Corporations and LLC’s, it makes sense for your small business to adopt either of those structures. It could decrease your tax liability while increasing the benefits.

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