All businesses must pay taxes. However, not all business taxes are the same for every business. The type, amount and form used in paying taxes is dependent upon the type of business entity. When someone starts a business, he or she must decide what business structure the business is to have. There are five business structures (Business Structures | Internal Revenue Service (irs.gov)), each with advantages and disadvantages. They are:
- Partnerships (Partnerships | Internal Revenue Service (irs.gov))
- Limited Liability Company (LLC) (Limited Liability Company (LLC) | Internal Revenue Service (irs.gov))
- Sole Proprietorships (Sole Proprietorships | Internal Revenue Service (irs.gov))
- Corporations (Forming a Corporation | Internal Revenue Service (irs.gov))
- S Corporations (S Corporations | Internal Revenue Service (irs.gov))
A Partnership is formed when two or more people join together to do a trade or business. Each partner contributes money, skill, labor or property to the partnership. Each partner shares in the profit or loss of that partnership. The unusual feature of a partnership is that the partnership itself does not pay income taxes. All other business structures do. Instead, a partnership must file an information return to report any income, deductions, gains, losses, etc. from the operation of that partnership. Profits and losses are “passed through” to the partners themselves. Each partner reports their share of profits or losses of the partnership on their own personal income tax return, hence the term “pass through”. Since partners are not employees, they do not receive a W-2 form indicating their income. Instead, the partnership furnishes a copy of Schedule K-1 (IRS Form 1065).
A partnership is a complex business structure. Mistakes in reporting income can be costly. Partnerships do not afford protections of personal assets and properties that other business structures provide. Therefore, it is important to hire a knowledgeable tax professional that can help navigate through the legal and tax features of the business. Remember, if you need help with payroll tax, it is best to consult a tax professional at Bullseye Tax Relief.
Limited Liability Company (LLC)
Since a Limited Liability Company (LLC) is allowed by each state, it is best to check with your state for its regulations for this business structure since regulations differ for each state. Owners of LLC are called members. Since most states do not restrict ownership, owners can be individuals, other LLCs, corporations or even foreign entities. Most states permit “single-member” LLCs whereby there is only one owner; however, there is no maximum number for membership. Depending upon the number of members and the elections of that LLC, the Internal Revenue Service (IRS) will treat the LLC as a corporation, filing IRS Form 8832 or as a “disregarded entity”.
Remember that any tax mistakes may be assigned to the business owner. For instance, if the business does not pay the correct tax amount, the IRS can place a lien, levy or seizure action against the owner of the business for these unpaid taxes. The IRS may assess a Trust Fund Recovery Penalty (TFRP) against the owner of a business that has not paid its tax obligation. To avoid this hassle, individuals should consult a tax professional, such as those at Bullseye Tax Relief for assistance. Our next blog will discuss sole proprietorships and employment taxes, including self-employment taxes.