One of the most important decisions you will make as an entrepreneur is what business structure you will choose. It can have tax implications, and the way you prepare your taxes can impact how much money you have after Uncle Sam takes his cut.

What Business Structure Do You Have?

As you consider how to proceed, it’s important to understand some aspects of your business structure. You can talk to an accountant or small business attorney for more information about each structure and what to expect:

  • Sole Proprietorship: This is the default for most businesses. You and your business aren’t separated for tax purposes or liability purposes.
  • LLC or Some Type of Partnership: There are different ways to set up your business as a partnership. You can do this to limit liability, and to distribute your money in different ways. For years, I was able to reduce my SE tax by assigning most of the income from my LLC with my now-ex to him. Now, of course, things are different because that business no longer exists because of our divorce.
  • S-Corp.: Many entrepreneurs like this business structure because it is a “pass through” where the business itself isn’t taxed. However, you need to maintain a payroll and give yourself a salary.
  • C-Corp.: When you organize this way, there are some advantages, but your company also pays taxes, and you pay taxes on your own income.

Understanding the implications of these structures is important. Get an idea of what to expect in taxes before you move forward. It’s also a good idea to make sure the business structure you choose fits your needs as an entrepreneur. Consider whether or not you can convert to something else, as well as the scalability involved and whether or not you will be able to set up payroll effectively.

Because I like things simple, and because I don’t plan a lot of expansion, my new business is a Single-Member LLC (a disregarded entity), although I’m looking into an S-Corp. as well. The old LLC with my ex worked well for a married couple because of the way we assigned the income on paper. However, that’s not really an option right now. For now, I’m just trying to get my bearings and re-establish my life and finances.

Deciding on a business structure can also make a difference depending on what state you are in. Living in Idaho means that it is easy and cheap for me to dissolve and register businesses. Some states are difficult and expensive. The ease of organizing a small business in Idaho is one of the reasons that one of my more recent ventures (another LLC) was organized here.

What you pay in federal and state taxes depends on a number of factors related to your business structure and how taxes are figured. There are ways for you to legally reduce your tax liability when you choose the right business structure for your company, and when you take the time to plan it out.

I'm Miranda and I'm a freelance financial journalist and money expert. My specialties are investing, small business/entrepreneurship and personal finance. The journey to business success and financial freedom is best undertaken with fellow travelers.

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