Small Business Structure And Taxes: What You Need To Know

In the world of business, even the smallest decisions can have a huge impact on the financial stability of a company and, by extension, those who own it. This is especially true when selecting a small business structure which the operations of a business will revolve around. The various options available for selection have huge impacts on how a business functions, one of the most important of which is taxes. Knowing what each option means for a business and its owners when tax season rolls around is important when undergoing this selection process, as each functions very differently and offers owners both benefits and drawbacks.

A nonprofit organization is perhaps the most preferred small business structure for many owners when it comes to taxes. This options is entirely tax exempt. However, there are strict requirements for those who wish their businesses to be included in this group. The owners of these businesses cannot earn a profit, and the applications to become a nonprofit company must be filed within 15 months of the formation of said business in order to be considered. At such an early stage, many businesses are unable to support this transition financially.

Another popular option for those who are just starting their business is a sole proprietorship. In this arrangement, there is only one owner who is entirely responsible for all legal and financial aspects of the business as well as tax burdens. While this might sound like a bit of a problem, this small business structure does have some distinct benefits. Sole proprietors are able to bypass the hassle of filing taxes through the business and can simply file the information through their income statements each year.

Partnerships are another viable options for those looking to choose a good model for their business. In a partnership, the partners themselves pay the taxes associated with the business. This allows them to bypass corporate tax rates, which can run very high. Unfortunately, like with a sole proprietorship, there is a great deal of liability placed on the shoulders of the partners with this structure, and those who cannot pay their debts are sure to encounter strict penalties which could be catastrophic for the business in question.

While these are three of the more popular structures which everyday small business owners utilize in successful companies around the globe, there are others. Speaking to a professional and closely considering the best option for your small business structure is the key to ensuring that your business has exactly the benefits it needs when tax season rolls around each year.