Each year, 2.2 million Americans overpay on their income taxes to the tune of nearly $1 billion. Many make this mistake because they don’t understand how their business structure will impact their taxes. They incorporated at the beginning at the advice of some lawyer or accountant, and never thought twice about how structure affects day-to-day operations. But it’s an important decision, and one that WILL impact how you’re taxed.
Legally speaking, the business and the owner are the same, and the business isn’t taxable in the eyes of the IRS. All income and liabilities are treated as if they belong fully to the owner of the business. When it comes time for tax season, you’ll see no real difference (except maybe filing a schedule C).
Just like a sole prop, the business and the owner are the same, tax wise. There is NO separate income tax on the partnership. Rather, each partner is taxed at the individual level. Again, you’ll see no real difference during tax season.
While they are a separate entity under law (and a valuable one), LLC’s have ‘pass-through’ taxation principles. Both losses and profits are reported at the individual level for federal taxes (but not always for state taxes). Nevertheless, even though income is passed through, liability is not; this contrast is what makes LLCs a highly valuable formation type, and one we recommend to many of our clients.
If you own an S Corp or C Corp, it’s a bit more complicated, and you’ll definitely want to work with a professional come tax time. Have questions about the structures above? Give us a call at 855.316.4425 and we’ll walk you through it.