One of the biggest challenges any business owner can face is paying taxes each year. Though you’re always required to file and report your earnings to the IRS, choosing the right business formation can help reduce your liability and save you money in the long run. But before you make your choice and start working with a New York business formation attorney, you need to understand how each business formation impacts your tax liability.
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Sole Proprietorships
Sole proprietorships are single-owner businesses where there is no formal distinction or division between the individual owner and the business itself. It’s ideal for freelancers, artists, and other individuals who run relatively simple businesses. These businesses are taxed at the individual rate since there is no legal separation between the owner and the business. Depending on your earnings, you may end up owing more than you would with other business formations.
Limited Liability Companies (LLCs)
LLCs protect individuals from business liability, but for tax purposes, they function similarly to sole proprietorships. All earnings from the business are passed to the owners of the LLC and taxed at the individual rate. That said, LLCs don’t have to pay federal income tax as a separate entity. That income tax is also assessed at the individual rate for each owner who receives earnings.
Partnerships
Like LLCs, partnerships require owners to pay taxes at their individual rate. The business itself does not pay federal income tax. Instead, all profits, losses, and tax liability are passed to the partners who pay the individual rate according to their tax bracket. If you’re looking for ways to save through a partnership, your best option is to speak with an experienced accountant or CPA. They’ll help you find potential tax credits and other ways to reduce your tax liability.
Corporations
Corporations are a completely different creature. They’re completely separate from their owners for tax purposes. The owners pay tax on the salaries and dividends they receive from the corporation. But the corporation itself also pays taxes on any retained earnings and profits. The corporate tax rate is typically lower than the individual rate, so business owners could end up saving money on taxes if they operate a corporation. But that tax rate could still put strain on companies that are struggling or are dealing with mounting losses each year.
Speak With Your New York Business Formation Attorney
Choosing the right business formation type can dramatically impact the amount of taxes you pay as a business owner and an individual. If you’re concerned about how each formation will impact your tax liability, consider speaking with an experienced accountant. They can provide you with detailed information about how each structure will impact what you owe.
Once you understand your potential tax liability, you’ll be ready to speak with a New York business formation attorney to get your company off the ground. At Gold Law Firm, our team is here to help, whether you’re trying to establish an LLC as a single owner or want to set up a corporation with several partners. Contact us today to schedule a consultation.