I decided I wanted to be an accountant after my first accounting class in high school. After
graduation, I started to pursue my dream but it did not come easily. I attempted to get my degree
several times but life seemed to get in the way. Finally, when my children were in elementary
school I succeeded. They are now grown and out of the house so I have decided that now is the
time for me to get the master’s degree that I have talked about for so many years.
I am currently working for a boutique public accounting firm in Florida and have been with them
for the last 2.5 years. I work on the accounting services side, not the tax side. Most of my clients
are non-profit corporations but I do have a variety of companies that are for profit. Prior to my
public accounting days, I worked for private companies in various industries.
When deciding how to structure a new business venture, several aspects must be considered.
These include the ease and cost associated with the formation, the amount of liability one is will
to assume, tax implications and the complexity of regulations and accounting.
Sole proprietorships and general partnerships are very similar to each other. They are easy and
inexpensive to set up. For partnerships, a written agreement is preferred but it is not required. The
income or loss from the business is passed along to the owner(s) personal tax return whether or
not a disbursement has been taken. The owner(s) are also personally liable for company debts.
Sole proprietorships and partnerships can be a good choice for low-risk businesses and owners
who want to test their business idea before forming a more formal business (SBA, 2019).
Choosing to be a corporation offers some protection from the personal liability associated with
sole proprietorships and partnerships but it is more complex and costly to establish. Corporations
fall into two categories: C corporations and S corporations. Shareholders who employed by C
corporation are employees and benefit from non-taxable fringe benefits and are only responsible
for half of the employment taxes as the corporation is responsible for the other half. If an S
corporation has been elected, the employed shareholders are still only responsible for half of the
employment taxes but do not benefit from non-taxable fringe benefits. A C corporation is subject
to double taxation. Its earnings are taxed first at the corporate level when earned, then again at the
shareholder level when distributed as dividends. An S corporation, by contrast, is subject to
single-level taxation, much like a partnership (Anderson, et al., 2023). Corporations can be a good
choice for medium- or higher-risk businesses, those that need to raise money, and businesses that
plan to "go public" or eventually be sold (SBA, 2019).
I have lived in Wisconsin (Go Packers!) my entire life and my background is in Tribal Gaming,
or you could say Government Accounting, for the past 25+ years. I am married (25 exciting years
and counting) with one daughter of college age and two ankle biting Pomeranians. I am not over
the moon excited about a tax course but I hope to change my perspective as I learn more about tax
planning over the next 10 weeks.
It can be very overwhelming when deciding on the right classification for a business venture.
However, having the right team in your corner, explaining the 26 US Code options can make it a
very smooth process.
Sole proprietorship classification has the simplicity of including the business income and
expenses with the personal tax filing. While the tax reporting has simplicity, this option also
comes with the biggest disadvantage potential; that is the personal liability is all on the owner.
Meaning all the business and personal assets are at risk. In summary, the classification of a sole
proprietorship, the owner is allowed all the profit and have unlimited liability responsibility for
debts against the business.
Partnership classification exists between two or more persons who join in a business venture.
Each person contributes money, property, labour or skill, and experts to share in the profits and
losses of the business. “A partnership must file an annual information return to report the
income, deductions, gains, losses, etc., from its operations, but it does not pay income tax.
Instead, it "passes through" profits or losses to its partners. Each partner reports their share of the
partnership's income or loss on their personal tax return (IRS, 2022).”
Corporation classification has shareholders vs. the traditional title “owners”. The noticeable
advantage is that this classification eliminates any personal liability of the shareholders. Then
there is the double taxation that occurs; corporation profits are taxed and then as shareholders
receive their dividend payout they are taxed again. I is also worth mentioning that tax rates for
corporations are below what an individual business owner would apply to personal tax filings.
There are several types of corporation classifications but the two main types are C Corp and S
Corp. A C Corp classification is most often seen associated with larger businesses with more
than 100 shareholders; while an S Corp classification is designed for smaller less than 100
shareholder businesses and “elect to pass corporate income, losses, deductions, and credits
through to their shareholders for federal tax purposes (IRS 2023)”. d Both classifications distribute
to shareholders using dividend payouts.
When approached by a small group of investors all wanting to band together to establish a Cheer
Gym for youth athletes; the best type of classification for this business venture at first glance
might be partnership. But there would be a lot of personal liability to the partners if the venture
were to be unsuccessful. Upon further research I would recommend the investors establish an S
Corp classification. With a declared S Corp, the investor could/would make up the board of
directors in order to diplomatically make decisions for the business. This is also a good choice
because the shareholders each receive a Schedule K-1 reflects the S corporation's items of
income, loss and deduction that are allocated to the shareholder for the year, and in turn each
shareholder reports this information with personal tax filings.
When starting a business, one of the first things that people need to worry about is the formation.
Anderson et al. (2023) explains the differences between the most popular ways to form a business. A
sole proprietorship is essentially the easiest business to start because it only involves one owner and it
has simple rules. This business entity is not subject to double taxation, and the owner will pay their
marginal rate on income after potentially qualifying for a 20% business deduction. On top of these
advantages, it is easy to contribute and withdraw cash and property. On the flip side, the full tax
amount must be paid on earnings whether they come out of the business or not. On top of that, owner-
employees are unable to deduct compensation and there are limitations on social security tax cuts and
using the fiscal calendar. Moving on, partnerships have a similar tax treatment as sole
proprietorships, there can just be multiple owners. Double taxation is avoided, and partners simply
pay taxes on their shares of earnings based on their individual rate, less a potential 20% business
income deduction. The disadvantages also closely mirror the last option, and partners are not
considered employees of the business, so there isn’t a lot of preferentially tax treatment for work
done within the business by owners. Finally, corporations offer a quite different approach because
they are an entity separate from their owners. The big difference is that in this case, there are more
deductions available and owner-employees can be considered separate employees. That results in
preferential tax treatment and benefits. On the negative end, double taxation typically results in a
higher tax bill. Furthermore, money withdrawn or deposited has to be recognized and many losses
can’t be transferred to owners until they are realized.
Many times, the simpler solution is often the easiest. As an example, imagine four investors that want
to open a gas station together. If I was guiding their decision, I would advise them to set the business
up as a partnership formation within an llc. According to the IRS (2022), an LLC set up as a
partnership can avoid a lot of the upfront paperwork that you would get when forming a corporation.
Despite this, it offers limited liability and avoids double taxation. There is also a ton of freedom when
it comes to depositing and withdrawing within the business, and should things not work out, it can
easily be dissolved. Unfortunately, there could be some hang ups if the investors want to spend a
significant amount of time working in the business as employees. If that is the case, a corporation
may be favorable due to the separation.
I actually had no prior experience with accounting, but have more than fifteen years in experience
with financial institutions, part of which was a brief jaunt in training to be a financial advisor,
where I obtained a series 7 license (now expired, unfortunately), but most of my time was spent
working in a banking centre for a large multinational banking corporation. It has been a long
road to get here, but I felt a change of career was needed, and although it was a big and somewhat
nerve-wracking step to take, I am glad I made that decision, as I have learned a great deal about
the accounting side of finances and although I am not yet sure where I want to focus my
specialization yet, I look forward to the new career opportunities going forward.
Apologies ahead of time, this is a bit long winded:
Sole Proprietorship: Has one owner, all profits from the business flow through to the
owner and are taxed at the owner’s nominal tax rate, owner must also pay self-employment taxes
(which is 15.3% I believe). Owner assumes full liability for any loses or lawsuits and may lose
personal assets.
Partnerships: Are very similar to a sole prop as they are taxed and liability is assessed
much in the same way, but there are some differences. In a partnership with no designated
general partner, all partners (of which there can be many or only 2) assume liability and profit
payouts according to their stake in the company, as in a company with three partners with a
20/50/30 stake would divide profits and losses according the that ratio. Partnerships generally
have no liability coverage for the partners, unless one partner is designated as a general partner.
If this occurs, the general partner is the de facto owner of the business and makes most of the
managerial and business decisions, the limited (or silent) partner has a liability of only the capital
invested in the business, much less say in how the company is run, and most likely a smaller
portion of the business profits, as the general partner is shouldering nearly all of the risk.
Corporation: Corporations are classified as entities unto themselves and as such the
corporation bears the brunt of liability costs, not the business owners (shareholders). Also of note
is that corporations pay a different federal tax rate than individuals, and it is usually below
whatever the business owners personal tax rate would be. There are two main types corporations
that would be considered (there are others, but they are rare), a Corp and an S Corp: d A C Corp is
most often associated with larger businesses that have more than 100 shareholders, or businesses
that plan to grow to such a level; an S Corp is designed for smaller business, is limited to under
100 shareholders, and it is more difficult to raise outside investment capital. Both corporations
have a more complex and rigid structure and reporting requirements and are therefore more
expensive and time consuming to maintain than other small business formats.
The business I am considering is a small business bakery co-owned by a husband-and-
wife team with no other employees, but they would eventually like to expand to at least 3 -5 other
employees as business grows. The husband does all the baking, and the wife administers the
business and both speak to and interact with vendors. Since both have an active role in the
business, a Sole Prop is out of consideration, so now we consider two of the big factors to
consider when opening a business, taxes and liability. The British Health and Safety Executive
(HSE, the British version of OSHA), has determined that on average bakeries have an average
workplace injury incident rate 18.2 times higher than the average workplace(Blythe, 2022), and as
with all food services, there is always the possibility of food-borne illnesses (in a bakeries case
most likely Salmonella and Listeria) and given these it would be prudent to suggest a business
format with liability protection, yet before making a decision, let’s consider taxes. If a
Partnership were used, both owners would be subject to pay their personal tax rates on all income
coming through the business, as married filing jointly they would subject to the tax bracket below
for the 2022 – 2023 year:
Married, filing jointly
Tax rate
Taxable income bracket
Taxes owed
10%
$0 to $20,550.
10% of taxable income.
12%
$20,551 to $83,550.
$2,055 plus 12% of the amount over $20,550.
22%
$83,551 to $178,150.
$9,615 plus 22% of the amount over $83,550.
24%
$178,151 to $340,100.
$30,427 plus 24% of the amount over $178,150.
32%
$340,101 to $431,900.
$69,295 plus 32% of the amount over $340,100.
Tax rate
Taxable income bracket
Taxes owed
35%
$431,901 to $647,850.
$98,671 plus 35% of the amount over $431,900.
37%
$647,851 or more.
$174,253.50 plus 37% of the amount over $647,850.
(Parys & Orem, 2023)
As you can see, if the business is successful, their tax rate can easily climb over the 32% mark.
If, on the other hand the business was setup as a C Corp they would be subject to the corporate
tax rate of 21% (Although the Biden Administration is in the process of trying to increase that to
28% and that would need to be considered for future concerns, but will most likely still be lower
than the owners personal tax rate) along with personal tax rates for salary drawn, and an S Corp
would act as a flow through entity and the couple would need to pay their personal tax rate on
their salary, but could take disbursements from the remaining amount which would not be subject
Federal SSI of Medicare taxes, making it a cheaper option (Osman, 2022; Crail et al., 2022).
The conclusion I draw from this is that as their tax consultant, I would recommend setting the
business up as an S Corp for the liability protection and reduced tax responsibility, even though it
will mean a bit more time and work to setup and maintain (An LLC setup to be taxed as an S
Corp would work quite well as well, but we have no option for choosing an LLC for this
exercise). As a two-person business team most of the administrative downsides will be greatly
reduced or even negated simply do the small size of the business.
References:
Blythe, T. (2022, March 14). Health and Safety in Bakery: Free Checklist. High Speed Training.
https://www.highspeedtraining.co.uk/hub/health-and-safety-in-a-bakery/
Crail, C., Haskins, J., & Bottorff, C. (2022, December 4). C-Corp vs. S-Corp: Which Business
Structure is Right for You? Forbes Advisor. https://www.forbes.com/advisor/business/c-
corp-vs-s-corp/
Parys, S., & Orem, T. (2023, January 30). Tax Brackets and Federal Income Tax Rates: 2022-
2023. NerdWallet. https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets
Osman, M. (2022, August 17). Should I Take an Owners Draw or Salary in an S Corp? Hourly.
https://www.hourly.io/post/owners-draw-or-salary-s-corp
Anderson, K., Hulse, D., and Rupert, T.,. Prentice Hall’s Federal Taxation 2023 Corporations,
Partnerships, Estates & Trusts. 2023.
IRS. (2022). Publication 541 (02/2022), Partnerships. Retrieved from
https://www.irs.gov/publications/p541#en_US_201312_publink1000104201
Anderson, Kenneth, et al., editors. Pearson’s Federal Taxation 2023 Corporations, Partnerships,
Estates & Trusts. Pearson Education, Inc, 2023.
26 US Code (1986) U.S. Code: Title 26 Retrieved from: www.law.cornell.edu
IRS (Sept 2022) Sole Proprietorships Retrieved from: www.irs.gov
IRS (Nov 2022) Tax Information for Partnerships Retrieved from: www.irs.gov
IRS (Jan 2023) Forming a Corporation Retrieved from: www.irs.gov
Anderson, Kenneth, et al., editors. Pearson’s Federal Taxation 2023 Corporations, Partnerships,
Estates & Trusts. Pearson Education, Inc, 2023.
U.S. Small Business Administration. “Choose a Business Structure”. November 19, 2019,
https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
