There are different kinds of businesses we can start, but of course, they have their pros and
cons. c The best way to select the type of business is by following the kind of business
activities we will have and how many people we are going to be involved in our business.
Sole Proprietor: This is a business owned by one individual. Usually selected by
individuals who start a new business with a modest amount of investment. They are
allowed to contribute cash to or withdraw profit from the business without tax
consequences. A disadvantage is that profits are taxed to the individual owner, whether
retained or withdrawn for personal use.
Partnership: It only reports the taxes of each individual, but it does not pay the taxes of
each one. They have to do it separately for their tax return. The tax rate for partners may
be lower than a corporation’s tax rate on the same level of taxable income, its income is
not subject to double taxation because it only taxes to the partner’s level. A disadvantage
could be that all partnership profits are taxed to their partners when they are earned, even
if they are not distributed. A partner’s rate could be even higher than a corporation’s rate
for the same level of taxable income.
Corporations: There are two categories: C-Corporations and S-Corporations. C-
corporations are subject to double taxation, first at the corporation and second at the
shareholder. By contrast, S-Corporation is subject to single-level taxation. Earnings are
counted for at the corporation.
C-corporations the shareholders who are employed by the corporation are
considered to be employees for tax purposes. So, they are responsible only for have of
their Social Security taxes, and the corporation will be responsible for the other half.
Also, the tax rate for the C-corporation may be lower than its owner’s margin tax rates. It
can use a fiscal instead of a calendar year as its reporting period. The earnings may be
used for reinvestment and the retirement of debt.
S-corporations generally pay no tax, instead, S-corporate income passes through
and is taxed to the shareholders. Pass-through income may qualify for the 20% qualified
business income deduction. c The self-employment tax does not apply to S-corporation
pass-through income. Shareholders are taxed on all of an S-corporation’s current year
profits whether or not the corporation distributes these profits and whether or not the
shareholders have the wherewithal to pay the tax on these profits.
Among all these taxable entities account, only corporations may deduct
compensation paid to owner-employees, because a sole proprietor who works at the
business may not deduct compensation paid to owner-employee. c Also, for partnerships, a
partner is not considered to be an employee.
The best way to assist a new business owner in identifying the correct form a
business should take, mainly for tax purposes, is knowing the kind of business activity,
future goals, and how far the client would like to succeed with the business. c In this case, it
is an individual who would like to open a Restoration Furniture Shop. c I have
recommended an S corporation, just for the fact it is a pass-through entity because the
business income is treated as the personal income of the owner and avoids double taxation.
Also, the client will be using some of her money and projecting to expand her business in
the future by opening other stores. c Also, in an S corporation, the shareholders are limited,
and they can enjoy limited liability.
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