Choosing the right business structure for your business is of utmost importance, especially with the new benefits included in the Tax Cut and Job Act (TCJA). The marginal tax rate system is eliminated for C corporation and is replaced by a 21% flat rate tax on all profits.
The Tax Cut and Job Act (TCJA) has significantly reformed business taxes in the US, especially for small businesses. The most popular types of business structures are:
- Sole Proprietorship – easiest to form as no entity formation with the state is required. The owner is in total control. No protection for personal assets.
- Partnership – 2 types of partnership: limited partnership (LP) and limited liability partnership (LLP) This is the simplest form of business structure if two or more people want to operate a business together. Compared to other business structure, this type of structure has a great if not the greatest potential for personal conflict in the day to day operation. In general, the partnership profits are passed through to the partners and taxed at the individual level. Unlimited partners also pay self-employment taxes.
- Limited Liability Company (LLC) – provides an extra layer of protection by separating personal assets and liabilities from business assts and liabilities. The profits of the LLC are passed through to its members (owners) and taxed at the individual level. Also, members of an LLC are considered self-employed and therefore are subject to self-employment taxes.
- C Corporation – completely separates the owners’ personal assets and liabilities from their business assets and liabilities thus offering the most protection for the owners. Because C corporations are completely independent from their owners, the company profits are taxed twice; first at he corporate level and secondly on the owners’ personal tax returns.
- S Corporation – is not formed at the state level. S Corporation status is granted by the IRS and is essentially structured to avoid double taxation. With this structure profits and some losses pass directly through to the owners’ personal income without additional corporate income tax.
The TCJA is especially good news for small businesses with pass-through business structures. Other than the C corporation, all the businesses discussed here have structures in which the business income passes through to their owners’ individual returns.
The new tax law benefits pass-through business owners because it provides for a deduction of 20% of their income before the ordinary income tax rates are applied. However there are phase-out income limits that apply to some business owners. In addition to the pass-through income deduction, under the new law, small business owners get immediate benefits on new equipment purchase and no longer must spread the benefit overall several years. Please consult with a tax professional for details.
Vinette Josephs, Tax Professional with Access E-File
Contributor | UWN Elite Member
Tax Professional with Access E-File