Choosing an entity for your business

Choosing the right type of entity for your business is crucial because it can impact your tax planning strategy. There are four major types of entities to choose from – sole proprietorship, partnership, corporations, and limited liability companies. Each of these entities has different advantages, disadvantages, and rules to help you decide which entity is right for your business.

As a sole proprietor, your business income, gains, deductions, and losses are to be reported on Schedule C of Form 1040. There is no corporate income tax for a sole proprietor.

Partnerships are best for companies with two or more owners and are in accordance with the state statutes they are created in. For tax purposes, a partnership is its own entity. A partnership is not subject to federal income tax, but the finances are reported to a partner’s individual federal income tax return.

Corporations can have a few more benefits from sole proprietorship and partnership, but they also have some disadvantages. A major advantage is that individuals are not liable and it is easier for raising money. These can have tax implications as the individual isn’t taxed, but rather the corporation is.

A Limited Liability Company, also known as LLC, is similar to a corporation as it provides limitations for the individuals. LLCs have similar tax treatment to partnerships.