Starting a new business comes with many responsibilities, one of the most important is dealing with taxes.
When first forming your business there are different types of alignments to choose from, the most popular is a Corporation or LLC. The taxes will vary accordingly, based on the choice.
There are different tax models and some businesses have more complex tax responsibilities than others.
As far as taxes for corporations, you can file as a C-Corp or an S-Corp. C-Corp businesses pay tax on all profits at the corporate level once, then when this profit is distributed to shareholders via dividends, the shareholder will again pay taxes on profits. Many people refer to this as double taxation.
On the other hand, an S-Corp (the IRS has much stricter rules to abide by as an S-Corp) will allow all of the business profits and losses to pass down to shareholders’ personal taxes, which in turn will be taxed as ordinary income, same as regular earnings. An S-Corp, also known as a pass-though entity, is only taxed on one level.
If you choose the route of LLC, by default the IRS sees your business as a partnership for tax purposes. This means you are also a pass-through entity. All your business profits and losses will pass down to the members of the LLC to be taxed at the personal level. However it’s important to know that an LLC can also choose to be taxed as a C-Corp. It’s generally recommended to be taxed as a C-Corp if the company plans on holding on cash and not distributing dividends.
It’s always important to discuss with your CPA or accountant which route will best suit the needs of you and your company. Many factors affect your decision, such as: how many shareholders will be in company? Will there be foreign shareholders? Does the company ever plan on going public?
When starting any business, it’s always best to consult professionals from the industry first.
We here at AHAD&CO are experienced and eager to answer all these questions and more, regarding all your tax, IRS and financial needs. Contact us today.
If you have any questions about planning for a new business or options available when starting your business please contact me directly. My email is firstname.lastname@example.org or phone: 718-790-1069.