When starting a company, it is important that you think through all of the legal and the financial issues. One of the most important considerations, for example, is what your tax obligations will be once the business has become operational.
There are different types of business organizations that you can form, which are subject to different treatment under the Internal Revenue Code (IRC). An experienced San Diego business law attorney can help you to make smart choices regarding tax issues when starting a company so you can ensure your organization gets the most favorable tax treatment possible.
Tax Issues When Starting a Company
One of the most important tax issues when starting a company is a determination on how the profits and losses from that enterprise will be reported to the Internal Revenue Service (IRS). The different types of business organizations report and pay taxes in different ways. For example:
- Sole proprietors and their businesses are one-on-the-same legal entity. The business owner declares profits and losses from the company on his personal tax return. The business does not need to file a separate tax return from the company.
- Partnerships and LLCs are taxed under pass through taxation rules. The individual owners of the partnership or members of the LLC will declare the income and the losses on their personal tax returns.
- S-Corporations allow for pass through taxation. Again, owners declare company income on their personal tax returns. The owners of S-Corporations enjoy an added level of flexibility. Some portion of the profits made by the S-Corporation can be paid out as distributions, which are not subject to Social Security and Medicare taxes. Owners who are actively involved in operating the S-Corporation must pay themselves a reasonable salary and may not take all of their income in the form of distributions or they can get into trouble with the IRS. This means that Social Security and Medicare taxes still must be paid on the portion of income taken as salary.
- C-Corporations are taxed as a separate legal entity than their owners. The company must pay taxes on profits that it makes. When dividends are paid out to owners, owners also must pay taxes on this earned income. As a result, there is a risk of double taxation that must be considered when deciding whether starting a C-corporation is the right choice for your organization.
You need to consider the different tax treatment of these different types of business entities as you make your choice for how you want your organization to be structured. Tax issues are not the only concern, as you also need to think about paperwork requirements, start-up costs and liability. However, tax issues are a very important concern.
You should speak with an experienced San Diego business law attorney for help understanding the different tax issues when starting a company. Your attorney can also help you to deal with other tax concerns like obtaining a Tax Identification Number (TIN) or Employer Identification Number (EIN) for your business, and collecting sales tax or managing payroll taxes for your employees. Call Sepahi Law Group, APC today to schedule a consultation and learn more.