Navigating Entity Types For Optimal Taxes

When starting a business, one of the most impactful early decisions entrepreneurs make is choosing between legal entity types like sole proprietorships, partnerships, LLCs, S-Corps & C-Corps. This decision carries major tax implications that business owners must consider carefully based on their objectives. Let’s overview key entities and associated tax considerations.

Sole Proprietorships & Partnerships Simplest entities with income/losses passed to personal returns. No special tax filings but owners face double taxation on profits with personal/SE tax. Can deduct many legitimate business expenses to reduce taxable income.

LLCs LLCs provide liability protection lacking in proprietorships/partnerships without double taxation. Profits/losses also pass to personal tax returns. Allows a greater range of deductions compared to C-Corps. Different tax classifications possible.

S-Corporations Another pass-through entity where profits/losses hit shareholders’ personal returns. Must file special 1120S return but no corporate taxes. Owners pay income taxes on their share of profits. Certain employment taxes still applied.

C-Corporations As separate entities, C-Corps file taxes through corporate returns. Income taxed once at corporate level and again through dividends on personal returns – leading to double taxation. But may yield other tax advantages.

Review projected business model, profit margins and goals with advisors to select the optimal structure. Tax treatment can shift dramatically across entities, impacting how much entrepreneurs pocket. Choosing correctly means substantial savings over the long-term.