“My business is taxed as an LLC” This is what I hear clients say when I ask how they are taxed. Don’t worry! It’s a very common misunderstanding! The next step is to determine what business structure is best for you.

What is the best type of business structure for your company? Sole Proprietorship, S-Corporation, C-Corp, Partnership – what’s the difference and which one should you choose? We’ll explore the options in this post.

If you’re a Sole proprietorship, you have become one with your business. It’s all owned by one person. It’s you and you and all about you! This type of business is subject to self-employment taxes, but it does not have to pay double taxes on its profits that corporations do. If you’re wondering if this is you, ask yourself, do I need to file a separate tax return annually for the business? If the answer is no, you’re taxed as a sole proprietorship. When filing this return, you’ll report it with your personal return on a Schedule C.

S-Corporations have some great benefits…if you qualify! S-Corporations officers are allowed to take 70% of profits from their company through distributions without paying employment taxes on that money. That’s HUGE! You have a choice between paying self-employment taxes on 30% of your profits or on 100% your profits! Uh yeah! I’ll take the 30% pretty please! This entity files a 1120S return and issues K-1s to it’s shareholders. This K-1 shows their share of the profit.

C-Corporations are what most people think of when they hear “company”. C-Corps have a board of directors, stockholders, and employees. C-corporations are the only business structure that pay double taxes on their profits – making it very important to keep those profits low. C-Corp owners can be paid from company earnings as dividends or distributions. C-Corps are required to keep records of decision making, have formal meetings and minutes, etc. C-corporations can raise money through selling stock or taking out loans – all ways S-corporate businesses cannot finance their company.

Partnerships are very similar in structure to C-Corp companies – except they don’t pay double taxes on their profits. Partnership businesses are made up of multiple people, and the tax burden is divided between all partners. Partnership owners report their business income or loss on Schedule K-l of their individual tax returns. The Partnership files a form 1065 that provides each partner with his/her portion of the profit.

It’s important to understand the different business structures and their benefits. I hope this article has helped clear up any confusion!