(1) |
Tax Considerations A single owner who is personally liable for the business's net profits income is generally reported on Form 1040 and taxed at individual rates. (a) Business Income and Deductions Individual business owners are required to disclose their net business profits on Schedule C. Additional deductions, such as those for self-employed health insurance, can be claimed on Schedule 1. The Qualified Business Income Deduction applies at a rate of 20% of the lower of qualified business income or modified taxable income. (b) Additional Medicare Tax The Additional Medicare Tax has been in effect since 2013. Taxpayers who self-employment earnings over $200,000 as single filing or $250,000 for married filing jointly are subject to an additional 0.9% tax on Medicare. |
(2) |
Legal Liability The liabilities of a sole proprietorship are considered to be the personal liabilities of the business owner, and the company ceases to exist in the event of the death of the sole proprietor. The profits of the business are the personal income of the owner, and legally the corporation is nothing more than an individual using a trade name, and when the assets of the business are unable to repay the business liabilities, the owner is required to pay the debts of the sole proprietorshipfrom personal property. Therefore, this form of entity is more suitable for industries with low risk. |
(1) |
Tax Considerations Partnerships are not required to pay income tax at the corporate level but required to complete tax information to file Form 1065 each year. General partners are subject to self-employment taxes on business income, while limited partners are generally exempt from such taxes. |
(2) |
Legal Liability Partners have to share profits, losses, etc. Partnerships are set up in accordance with the individual laws of each state, such as fund corporations, partnerships, corporation, and other organizations (e.g., limited liability companies). |
(1) |
Tax Considerations Each member of an LLC will be taxed in proportion to his or her ownership share of business income, using Form 1065 (similar to a partnership) to report business income or loss (share of profit or loss) to the IRS. In a single-member limited liability structure, an individual owner assumes responsibility for managing the company and fulfilling tax obligations and can report profits or losses from business activities on Schedule C of Form 1040. |
(2) |
Legal Liability This structure provides limited liability protection for its members while allowing gains and losses to be passed through to the owners as income on their individual tax returns. A limited liability company may have one or more members, profits and losses do not have to be divided equally among the members, its operating agreement governs the conduct of the business and its members, and the tax liability of the partners depends on their level of involvement in the business. |
(1) |
Tax Considerations C-Corp are required to file Form 1120 to report profits and losses, tax credits, and income. Since 2018, a flat rate of 21% is applied to U.S. Corporation Income Tax Returns, the tax return is due on the 15th day of the 4th month following the end of the tax year. |
(2) |
Legal Liability Business owners organized as C-Corp are not jointly and severally liable for the company's debts, which means that their personal property will not be used to indemnify the company. |
(1) |
Tax Considerations The IRS Form 2553 is utilized to submit to the Internal Revenue Service, requesting that a business entity be classified as an S corporation for tax-related matters. For a newly established corporation, the filing deadline is 2.5 months after the beginning of the tax year. In contrast to the widely used C-Corp, the S-Corp is allowed to transfer its taxable income, credits and losses directly to its shareholders. So, there is no double taxation requirement for this structure. The biggest advantage of S-Corps over Partnerships and LLCs is that shareholders are exempt from self-employment taxes, however, the S-Corporation is responsible for paying Federal Insurance Contributions Act (FICA) taxes on compensation received by shareholder-employees. |
(2) |
Legal Liability Similar with a C-Corp, business owners and shareholders organized as an S-Corp are not personally liable for the debts and obligations of the corporation. If the corporation is sued and forced to declare bankruptcy, the owners will not be required to pay the corporation's debts out of their personal property. |
Disclaimer All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage. |