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tax time can strike terror into the hearts of even the most seasoned business owners but it doesn't have to you can set your business up for trouble-free taxes when you understand different business entities and their tax structures for most small businesses a pass-through tax structure offers the biggest benefits pass-through taxation happens when your business income passes through to your personal income tax sparing you from paying corporate taxes it also helps you avoid the double taxation c-corp owner's phase paying both corporate income tax and taxes on shareholder dividends so which entities offer pass-through taxation sole proprietors operate without a legal business entity and all their income must be reported on their personal tax return they will likely need to pay self-employment taxes on their earnings and they don't benefit from the protections provided by a legal entity like an llc speaking of llcs they too offer pass-through taxation with the additional benefit of providing legal protection for business owners personal assets llcs are a great choice for most small businesses and with inkfile you can get yours for zero dollars plus state fee finally s-corps also provide pass-through taxation with only capital gains and passive income subject to federal income tax and s corp can reduce your self-employment tax as well for llcs looking to pay less in taxes filing an s-corp election is a great choice with this election the irs views your llc as an s corp and you receive the benefits find out how much you can save with ink file's s-corp tax calculator and if you decide an s-corp designation is right for your llc you can file the s corp tax election by completing form 2553 and filing with the irs tax time doesn't have to be terror time but to make it as painless as possible you'll need to plan ahead and choose the entity and designation that's right for you and whenever you need some extra help ink files accounting and bookkeeping services make tracking preparing and filing your taxes a breeze
Thanks for your comment Brian Tews, have a nice day.
- Kristie Sark, Staff Member
hello my name is Ian Alden I'm an attorney here with law for small business and I'm here today to talk to you about pass-through enemies what they are and how they can work for you now to understand a pass-through entity its first important to understand what a traditional corporation is and specifically how it's taxed before the 1970s when LLC's became prevalent corporations were used by just about every business owner now corporation it's what's called a double tax entity because income is taxed twice once to the corporation at its corporate tax rate which needs to be 35 percent now it's 21 percent and then again to the owners or shareholders of the corporation when that income is paid out in the form of the dividend double tax on the same income pass-through entities which you know include certain kinds of corporations like subchapter S corporations as well as partnerships sulfa prior ships and most LLC's or limited liability companies pass-through entities do not have double taxation because the entities don't pay taxes on the income that comes through them all the profits and losses of a pass-through entity will pass right through that entity to the owners who will then pay taxes at their personal tax rates that's what's called the pass-through entity because all the profits and losses just pass through obviously if you're looking at this just as a numbers game past their entities are very attractive for most business owners because if you're paying double tax on the same income that's less money in the owners pockets at the end of the day so there's that going for pass-through entities but there's also a few logistical things going for them like you know past their entities don't have to file their own tax returns or pay their own taxes they might file information returns in the case of a partnership or an S corporation but they're not actually paying taxes at the entity level and so the reporting obligations are typically a bit simpler however there are some drawbacks to pass-through entities that make them less than attractive for certain business owners for example if your business owner with a lot of income in any given year and you want to be able to time the income that you're getting from your business a pass-through entity isn't going to work because you are allocated all the profits and losses of your company right as they come through the door so there's no way for you to time that but if you're using a traditional C corporation the double tax entity all the money flows right into the corporation the corporation pays taxes on it and that money sits with the corporation so the owners don't have to report that income on their personal tax returns until such times that income is then paid out by the corporation in a form of a dividend which can be timed by the corporation and its owners similarly a corporation might work better for any business owner looking to get investment especially venture capital investment and there's a pretty simple reason why investors and venture capital investors don't like pass-through entities and that's because with the pass-through entity again any profits and losses are passed right through to the owners including investors with an ownership stake right when the money comes through the door even if that money itself isn't distributed out the owners so you could be in a situation as an investor in a past their entity where you are being taxed on income that you're not personally seeing or receiving that doesn't work for a lot of investors and so venture capital investors will typically insist on AC corporation with its double taxation and a few other benefits such as multiple classes of stock which can treat investors better than owners things like that so there's a lot of nuances here with pass-through entities that it's important to be aware of as a business owner but really at the end of the day every business is different every business business owners situation is different and what you need is very dependent on what it is that you are looking for so if you're unsure whether or not a pass-through entity is going to work for you I'd recommend that you reach out to one of our attorneys we've more than happy to sit down with you either in person or over the phone and discuss your business situation and what kind of entity would work best for you so give us a call or send us an email or visit our website today we'd be happy to sit down with you you
Thanks Min your participation is very much appreciated
- Kristie Sark
About the author
I've studied nanotechnology at National Defense University in Fort Lesley J McNair and I am an expert in scientific classification. I usually feel sleepy. My previous job was electrical technician I held this position for 27 years, I love talking about dominoes and stockcar racing. Huge fan of Lew Alcindor I practice yoga and collect cheese labels.
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