a 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). a Owner assumes full liability for any loses
or lawsuits and may lose personal assets.
a a a 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. a 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. a 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.
a a a Corporation: Corporations are classified as entity’s unto themselves and as such
the corporation bears the brunt of liability costs, not the business owners (shareholders). a
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: 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. a 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.
a a a 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. a 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. a 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.
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. a 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).
a a a 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. a
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
