As a business owner, you know how important it is to save money. But did you know that one of the best ways to do so may be with the right entity structure? With the right entity structure, you can maximize your tax savings not just for this year, but for years to come. Let’s break down the different types of legal entities and how each one can benefit you.
What is Entity Structure?
Entity structure refers to the legal form that a business takes on. It can be a sole proprietorship, a partnership, an LLC (limited liability company), or a corporation. There are pros and cons to each type of entity structure, so it’s important to consider all of them before deciding which type is best suited for your business.
Types Of Entity Structures
A sole proprietorship is the simplest type of business structure and requires no paperwork to create. The individual (owner) is responsible for all profit and losses, so everything is reported on their personal income tax return. This type of structure works well if you are starting a small side-gig or freelance venture where there isn’t much overhead or liability risk associated with it.
Similar to Sole Proprietorship except two or more individuals own the business together. Each partner will be taxed individually based on their share of profits and losses. It’s important to consult an attorney if you decide to form a partnership because there are many details that need to be worked out ahead of time such as asset ownership, profit distribution, and responsibilities between partners.
LLC (Limited Liability Company)
In an LLC, owners are not liable for debts incurred by the company which makes it a popular choice among business owners who have significant assets they want to protect from creditors in case something goes wrong with their venture. LLCs also allow pass-through taxation which allows owners to report profits/losses on their personal income tax returns without having to pay taxes twice like corporations do.
Corporation (C Corp/S Corp)
A corporation is treated as its own legal entity with shareholders who own stock in the company and have limited liability when it comes to debt incurred by the business. Corporations are taxed differently than other entities so consulting with a CPA is important before making this decision since there can be double taxation involved depending on how much money your company makes per year. Plus, corporations require additional paperwork compared to other legal structures such as filing Articles of Incorporation with your state government so there’s more administrative work involved too!
Why Does Entity Structure Matter?
The main reason why entity structure matters for businesses is because it can affect taxes. Depending on the type of entity structure chosen, tax deductions and exemptions may apply that could reduce tax liabilities significantly.
How Can I Save Money With The Right Entity Structure?
Choosing the right entity structure can save you lots of money in taxes while also protecting your assets from potential creditors down the line. It’s important to consult a lawyer before making any decisions as they will be able to guide you through all of your options and help determine which type of entity best suits your needs! Once you’ve decided on an entity type then it’s time for some good old fashioned number crunching—so get ready! With proper planning and research, you’ll soon be able maximize your savings through savvy use of legal entities structures! Happy Tax Season!