Choosing Business Structure

Helps Determine Tax Impact and Profits

Did you know that your profits will be subjected to tax laws and they depend on how you operate your business?

.

Your business structure  determines the taxes and, after all, it help gauge how much of a profit it will bring in to your business

WHAT IS A BUSINESS STRUCTURE? A business structure reflects how your business is organized for both tax and other legal purposes.

It determines the success of your business and how to maintain the profit flow.

SOLE PROPRIETORSHIP

Your profits is at the greatest risk of being taxed at the highest level possible.

This could reduce your profits.

Self Employment taxes Taxable Income Obama tax

3 LEVELS OF TAX WHEN SELF-EMPLOYED

This tax is the Social Security Tax (FICA and Medicare). You are taxed at a rate of 15.3% on the first 118,700 in profits, then 3.9% on every dollar of profit

You take the profits on Line 12 of your Form 1040 and subtract deductions (itemized or standard) and exemption credits (you and dependents) leaving you with taxable income. It is taxed at your marginal tax rate between 15% and 39.6% depending upon how much taxable income you make in that tax year.

You then add an additional 3.9% Obama tax on certain amounts over the threshold income levels and in effect you could be paying 15.3% plus 39.6% plus an additional 3.9% federal tax or 58.8% NOT including state taxes such as up to 11% in California.

SINGLE MEMBER LIMITEDLIABILITY COMPANY (LLC)

• disregarded for federal tax purposes • taxed exactly as a self-employed

Some states, like California, could also be subject to an LLC entity tax based on “Gross Receipts,” not net profits of the LLC. The tax impact is it could be as high as 60% to be taxed on your business

HUSBAND AND WIFE(Self-Employed)

• The federal tax rules require that both spouses file a

“partnership” tax return unless they make a special

tax election to be taxed as a marital joint venture or MJV

• An MJV files 1 Schedule C for the business vs a

partnership files a Form 1065 Return

• Each spouse is taxed at the self-employed (SE) tax rates

on their equally divided share of the profits.

• Both spouses have a 118,700.00 limit that is subject to the full 15.3% SE tax instead of the single Schedule C under the MJV where the profits are not divided between the spouses so that only the first 118,700.00 in profits is subject to the SE tax.

MULTIPLE MEMBERLIMITED LIABILITYCOMPANY (MMLLC)

• Unless the LLC elects to be taxed as a corporation, then

it will be taxed under the partnership tax rules

• Each partner is subject to the SE taxes of 15.3% on the first

118,700 in profits each partner received (or guaranteed

payments to each partner by the partnership).

• Any LLC entity can make an election to be taxed as a corporation• It will be taxed as if a “C” corporation unless it makes a further election to

be taxed as an “S” corporation. • The other tax problems with the MMLLC is that, under partnership tax

rules, many transactions between the partnership business and each of its partners has with it a host of tax traps that in effect could result in higher tax impacts overall.

GENERAL PARTNERSHIP

• Profits or losses are allocated among the partners according to the percentage they each own of the shares of the partnership

• Losses are limited in some cases based on the capital account of each partner as you may not deduct those losses if they are more than your basis in the shares you own in the partnership.

• If you contribute 10,000 in capital own 50% of the partnership and have 60,000 in loss then you can only deduct 10,000 of your half of the 60,000 in loss and the remaining loss is suspended and carries forward into the next year.

Payments to each partner from profits will be taxed as if they are self-employed so again we face the higher levels of tax exposure in a partnership.

LIMITEDPARTNERSHIP

• Any loss in the business is limited under the Passive Activity Loss (PAL) rules so there is a definite restriction on how much you will be able to claim

There is no Self-Employed tax as you are not active in the business

C CORPORATION

• Every corporation begin when formed as a typical “C” regular corporation (and then may make an election to be taxed as an “S” corporation,

• A “C” corporation shareholder is taxed twice• Double taxed on the same profits and the dividend paid

to the shareholder is not a deduction for the “C” corporation

S CORPORATION• An “S” corporation refers to Sub-Chapter S of the

Internal Revenue Code and in effect the profits pass-through the corporation with no tax at the corporate level and then they are taxed at the personal tax return level of each shareholder of the “S” corporation

• A “C” corporation shareholder is taxed twiceThe trap here is that if the shareholder is active in the business of the corporation then the tax laws require you to be paid a wage and tax it as taxable wages on a W2 thus invoking all the FICA, Medicare, FUTA, SUTA, and employer matching of FICA and Medicare tax. Moreover, the wages (salary and compensation) must be reasonable (not unreasonably high or low) and for many types of payments to its shareholders the “S” corporation must use partnership tax laws in deciding the level of tax owed by the shareholder.deduction for the “C” corporation

Need more help with taxes and starting your own business?

Visit www.wealthandtaxguru.com