- Sole Proprietorship:
- The owners of these businesses report business income and expenses on their personal tax returns, and pay tax on any profit.
- Corporations:
- ‘C’ Corporation: A ‘C’ corporation pays corporate income tax on its profits. If a C corp. pays dividends to its owners (shareholders), they report those dividends on their personal tax returns, and pay taxes on them. Many small businesses end up paying more taxes under this “double taxation” system.
- ‘S’ Corporation: You may be able to avoid double taxation by being taxed as an ‘S’ corporation. An S corp. does not have to pay corporate income tax. All of its profits “pass through” to the shareholders’ personal tax returns, and the shareholders pay personal income tax on them.
- Limited Liability Company: A limited liability company is taxed the same as a sole proprietor (if there is one owner) or a partnership (if there are multiple owners). However, an LLC can choose to be taxed as a C corporation or an S corporation. This can sometimes allow LLC’s owners to minimize self-employment taxes, or to deduct expenses that would not otherwise be deductible.
Need help with your taxes? Do you already have your business entity established and need help understanding what expenses are considered tax write-offs? We can help. Ask us, and we can refer you to one of our recommended tax accountants. Some of the things they can help you with are:
- Explaining deductible start up costs
- Organizational deductions
- How much you can deduct
- What is considered the “start-up” phase
- How to claim your deduction
