The form of business that is established can give rise to tax-related
implications. When selecting a sole proprietorship as the tax
reporting entity for a new business, the main advantage is simple tax
rules, as the business income is reported on the proprietor’s personal
income tax return (Cooper, 2016). A major disadvantage is the
personal liability of the owner. In a sole proprietorship business, the
owner takes the profit as his income, on which he has to pay tax just
as on his main income.
The main advantage of selecting a partnership as a tax reporting
entity is the easy set-up process and simple taxation on the business
income, which is considered as the personal income of the partners.
However, the main disadvantage is the personal liability of the
partners in case of debts or financial obligations (Tunnell, 2020). The
payment of profits to owners is distributed as the personal income of
the partners. The tax is reported on the income tax returns of each of
the partners of the partnership business.
When a corporation form of business is chosen for a tax reporting
entity, the chief advantage is that it has a distinct legal identity which
restricts the personal liability of the owners. The main disadvantage is
a complex taxation process due to the application of the double
taxation method, where the corporate has to pay tax on the income,
and the shareholders must pay tax on dividends (Larisa, 2020). This
taxable entity accounts for payments to owners in the form of
salaries, remuneration, wages and dividends and they are considered
the personal income of the owners on which tax is computed.
While opening a chain of gas stations along with three other
investors, the type of business entity that would be best to handle the
tax reporting for the business is ‘partnership.’ The partnership has
been chosen as the ideal business type since it can be easily formed
due to minimal compliance and formality requirements. Each of the
partners would have control over the decision-making process and
take vital decisions promptly (Efremova, 2020). In a partnership
business, the taxation method is simple since the business income
would be the personal income of each of the partners based on the
predetermined ratio. The possibility of double taxation could be
avoided, which would otherwise arise in the case of a corporate form
of business. The tax on the income would be charged as the normal
tax returns that are paid by the partners for their other or normal
income.
References
Aleksandrovna Efremova, T. (2020). Developing tax administration in
the context of the partnership of participants of Tax Relations. 3C
Empresa. Investigación y Pensamiento Crítico, 9(3), 109–123.
https://doi.org/10.17993/3cemp.2020.090343.109-123
Cooper, M., McClelland, J., Pearce, J., Prisinzano, R., Sullivan, J.,
Yagan, D., Zidar, O., & Zwick, E. (2016). Business in the United States:
Who owns it, and how much tax do they pay? Tax Policy and the
Economy, 30(1), 91–128. https://doi.org/10.1086/685594
Larisa, A. A., Fatima, S. A., & Madina, T. A. (2020). Double taxation:
Concept, causes and procedure for elimination. European Proceedings
of Social and Behavioural Sciences.
https://doi.org/10.15405/epsbs.2020.10.05.170
Tunnell, L., & Ricketts, R. (2020). Taxation essentials of llcs and
partnerships. https://doi.org/10.1002/9781119722304
