When it comes to starting a business, there are many factors to consider before you get it up and running. One of those decisions is what type of business structure you want to form. The two most common business structures are an LLC and Corporation. There are different factors to think about when setting up your business structure, and the biggest one is what type of taxes you are going to be facing based on the type of business you start.
LLC or Corporation?
The business structure you end up choosing will affect many aspects of your business. It influences day-to-day operations, how much personal risk you are willing to put in, and your taxes.
An LLC or a limited liability company mixes aspects of a corporation and partnership business structure. According to Investopedia, an LLC offers a small business a more formal business than a sole proprietorship or partnership. It also protects the owner from personal liability for any debts that their business incurs.
There are a couple of different types of corporations that you can set up. Each of them has different benefits depending on the type of business you are creating. We are going to focus on the most common type of corporation, an S corp. An S corp is much more rigidly structured than LLCs. They include formalities such as having corporate bylaws, conducting shareholder meetings, and regulations in issuing stocks.
According to the U.S. Small Business Administration, profits and losses can get passed through to your personal income without facing any federal taxes. However, a member of an LLC is considered self-employed and must pay self-employment taxes. This means that profit from the business will be taxed at the owner’s personal tax rate.
S Corp Taxes
The structure of S Corps allows them to have a pass-through option when it comes to paying taxes. An S Corp passes corporate income and losses through to their shareholders. They can then report the flow-through on their personal taxes and have it assessed at personal tax rates. This helps S Corps avoid double taxation on corporate income.
Although both business structures allow for owners to avoid corporate tax rates, S Corps are much more rigid in their structure and can have up to 100 shareholders that are paying taxes. If you are going to set up a different type of corporation, you will have to pay corporate taxes and the rates vary from state to state.
Whether you decide to create an LLC or S Corp for your business, you will most likely pay your business taxes at your personal rate.