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How to legally structure a new business is one of the first steps to consider when incorporating a company. You know that your business will have to pay taxes, but you don’t know how much, or how it will be taxed. Different business structures have different tax implications and there is no one-size-fits-all approach. Currently, there are two ways a business can be taxed: the first is as a traditional C-corporation and the second is partnership taxation, like a limited liability company.
For traditional “C” corporations, income paid to the Corporation is taxed at a flat rate. If any of the corporation’s income is distributed to the shareholders of the Corporation as dividends, then those dividends are also taxed. This tax structure is referred to as “double taxation.”
Being taxed twice may not sound very appealing, but the biggest benefit of a traditional “C” Corporation is that the ultimate tax liability remains with the entity, with a few exceptions. Another benefit of the traditional “C” corporation is retained earnings – funds that remain after the Corporation pays its bills and debts and distributes profits to the shareholders. Retained earnings are tax exempt unless and until they are distributed to shareholders.
Pass-through entities, which include partnerships, limited liability companies, and S-corporations, among others, are taxed at ordinary income rates. Unlike with the traditional “C” corporation, there is no entity-level tax for pass-through entities. The income received by the pass-through entity instead “passes through” to the owners of the entity based on their ownership percentages. The ultimate tax liability will indefinitely remain with the owners of the entity. There are other important considerations related to taxation of pass-through entities and their members.
Smart Counsel can assist you with making the right decisions for your business and owners. For more information, visit www.smart-counsel.com
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