Tax concept

The Tax Impact of Selecting the Right Organizational Structure for Your Business

The various structures your business can be organized around have different tax advantages, some of which would fit your business better than the others. Ask your accountant about which business structure is right for your enterprise.

As an entrepreneur, you would eventually come to realize the need to outsource vital functions to someone else instead of relying on your own steam. Your time is valuable and should be spent growing your enterprise or serving your customers. One of the most important of these functions is tax management.

Exactly how your business taxes are arranged would depend on the nature of your business and the size and scale of your income. The rules can vary wildly from state to state; the advice that applies for a business owner seeking tax help in Utah will not apply wholly to any other state. Thus, it is generally a good idea to seek professional guidance on the smartest option your business can take.

A Matter of Structure

When running a business, the tax matters of your enterprise can be remarkably complex. While it seems straightforward if you happened to be the only employee in a venture, it can get complex pretty quickly as your business grows. Ensuring that your enterprise remains tax efficient as it grows is a crucial part of the entrepreneurial process, and often requires a careful analysis of the structure your enterprise needs.

Most small businesses are not subject to the same business tax requirements that large enterprises do simply because they count as pass-through income made by the owner of the business and are taxed as part of their personal income. The smallest of ventures are often proprietorships, hence they avoid many of the associated taxes associated with corporations. Partnerships and limited liability companies (LLCs), meanwhile, are subject to similar taxation structures.

Due to having a much higher net income than other types of businesses, corporations are usually taxed much higher, with a broad assortment of taxes associated with them on a Federal and State level. Not only are corporations taxed on their profits, but their shareholders are also taxed on their dividends, which could be disadvantageous; moreover, the owners of corporations are often double taxed, with both their company dividends and their own salaries receiving additional taxation.

Toward the Future

On the surface, it may appear as though your business is tax-advantaged if it isn’t arranged as a corporation, but this comes with a tremendous cost for most ventures as they grow. Many of the recent tax cuts and exceptions that apply for large businesses may not apply to proprietorships, partnerships, and LLCs. A deduction granted to smaller businesses, the Qualified Business Income Deduction, was set up by Congress that reduces the number of taxes owed by enterprises by about 20%

Likewise, as companies grow, the need to cover for potential liabilities begins to outweigh whatever tax benefits there may have been using an alternate business organizational structure. Organizing as a corporation may prove more beneficial to a company in the long run despite the tax situation, and companies must work around that to manage the amount of taxes they owe.

Professional Guidance

Computing for tax

As your business grows, time will come when you would need to rethink the way it is organized. Navigating the tax implications of your enterprise is something that you can ill-afford to do on your own. Always consult with pertinent advisors—tax attorneys and certified public accountants among them—to help you make informed decisions on how your company will be arranged to balance legal protections with tax advantages.