The basics of legal structuring for business and tax purposes

The basics of legal structuring for business and tax purposes

Legal structuring simplified…

Legal structuring is the term given to the way your business is organized to perform. This legal structure shows up in every area of your business organization and affects how the company shares interests and liabilities, how it takes decisions, and even what it files on company tax returns.

Several types of businesses can be created through the process of legal structuring. It is, however, important to deeply consider (and even perhaps seek expert guidance regarding the legal entity you will like to adapt as your business structure, as this will affect how your company carries out business operations in both the long and short run.

Types of business structures

Your business structure is simply the outcome of legal structuring. It is the legal entity under which your business is classified. Broadly speaking, there are 4 types of business structures, and since this is an overview of legal structuring for your business entities, we will be explaining all four basic types of businesses.

  1. Sole proprietorship: This legal structure is probably the easiest to set up and run. This type of business involves one individual who owns and is responsible for running the daily operations of the business.

Legally, the owner of this type of business does not have to file separate tax returns for the business because the law recognizes him and his business as one. He is, however, required to file Form 1040, which must include a schedule C and a Schedule SE for self-employment tax.

Additionally, the owner of this business structure is liable for all obligations pertaining to the business and might be able to claim personal tax deductions on their return.

  1. Partnership business structure: Besides sole proprietorship, a partnership is the next simplest form of legal entity structuring.

For a partnership to work, it must have two or more owners who come together to share both profits and liabilities.

Tax-wise, the liabilities for the operation of this business structure are borne by all partners. These partners must report that information on their 1065 form and file it with their personal tax return, and Schedule K-1. Partners are also expected to report their share of profits (or losses) acquired from the business on their personal tax returns.

In a partnership business structure, each partner is awarded their respective share of the business and will profit or bear losses from the company’s transactions according to their share percentage. Their percentage of ownership will also determine how much each partner is expected to pay in self-employment taxes.

In a nutshell, partnerships are somewhat a fusion of the simplicity of sole proprietorships and the advantageous benefits of limited liability.

  1. Corporations: Simply put, a corporation gives your business a separate legal entity from you and its other shareholders. Albeit complex, it secures your assets, helps you secure swift funding, and grants shareholders limited liability protection. Additionally, if you ever intend to take your company public, it must first be legally incorporated as a corporation.

There are two types of corporations, namely, a C- corporation (a corporation that is viewed as a separate legal entity from its shareholders), and an S- corporation (a corporation resembling a partnership business structure and consisting of up to a hundred shareholders).

Setting up a corporation requires owners to comply with tasking tax requirements and regulations, therefore, the entire tax-related legal structuring process for a corporation is best left to a team of professionals like ours.

Tax-wise, corporations are expected to pay both federal and state taxes, and each shareholder must disclose his dividend payment when filing personal income tax returns.

  1. A Limited Liability Company (LLC): This legal structure embodies characteristics of both a partnership business structure and a corporation. People who own Limited Liability Companies enjoy personal liability protection and do not have to go through the rigorous process of filing business and tax documents that corporations have to.

Here the assets, profits, and liabilities of the enterprise are the responsibility of the owners, and each partner is required to report their share of the profits (or losses) gained from the business.

Unlike the legal structure of an S-corporation, a Limited Liability Company can have an unlimited number of shareholders. You may, however, be required to file an operating agreement alongside your articles of association to the secretary of state in the state where you intend to conduct business.

 

Legal structuring for your taxes.

Choosing an efficient legal structure is of utmost importance to the running and functionality of your business, as the type of business legal entity will determine how you file and pay your taxes.

Here’s a link to find tables of tax arrangements for each of the business structures listed above.

Click here.

 

Get help with business planning and legal structuring

Starting a new business? Choosing the right business structure is a fundamental step in the right direction.

We are a tax relief firm dedicated to working with you through each process of your legal business structuring. Our team of qualified professionals is available from 7 am – 8 pm, EDT to provide you with the assistance you need to plan your legal business structure and be well on your way to business stardom.

Contact us now at 888-585-8629 or 617-430-4674 or send us an email at [email protected].

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