Tax Benefits of the Common Business Entities

The most common legal ways to organize and define your business are Sole Proprietor, Partnership or LLC, S-Corporation and C-Corporation. Our law firm specializes in business formations and mergers. Many business owners ask, “What are the benefits or liabilities in terms of income or business taxes?”

A Sole Proprietorship provides the very least benefits to save on taxes. A Sole Proprietor pays taxes on business profits (income) as well as self-employment tax. This main benefit to this kind of business is the ability to deduct business expenses from your income.

A Partnership or an LLC (Limited Liability Company) doesn’t pay income taxes on profits; the members themselves pay FICA taxes on their “guaranteed income,” and income taxes on profits. When partners leave profits in the business instead of withdrawing them, these profits are known as retained earnings, and the IRS requires the partners to pay taxes on the retained earnings even though it is not distributed. An LLC taxed as a partnership is a better way to own real property or assets that will appreciate, because it is not a taxable event to transfer the property back to the partners, even if it has grown in value. Corporations are not allowed this benefit.

An S-Corporation is designed for small business owners. The S-Corp itself doesn’t pay taxes, the shareholders do. Much like a partnership or LLC, if an S-Corp has profits, the shareholders are expected to pay taxes on the earnings, whether or not they are distributed.

A C-Corporation will owe corporate taxes, and the shareholders will also pay taxes on dividends they receive. The C-Corp can choose to retain earnings and not to distribute profits. A C-Corporation will pay taxes on those retained earnings, depending on the amount at a rate of 15-30 percent tax one time, and then can roll that income back into the business and use it tax free from then on.

If you have questions about business formations, mergers and acquisitions in Boise, please get in touch with our firm today.