Later this year, America will see President Biden bid to get his tax increase proposal approved as a part of his $3.5 trillion economic plan. Under the proposal, President Biden hopes to increase corporation tax from 21 percent to 28 percent. As the rumors swirl and the end of the year draws near, leading industry CEOs have voiced their concerns over the impending increase, saying it would significantly hurt and deter business investment and growth plans. Many are worried about how the increase in corporate taxation would impact their profitability, voicing the ongoing double taxation battle that many corporations continue to face in the U.S. The issue also highlights another important point for the business community: the importance of choosing the right business structure. With an array of structures to choose from, new businesses must take the time to consider all the implications- tax and otherwise- of the different business structures before incorporation.
Your Choice Of Structure Heavily Determines Your Business’ Tax Treatment
Each business structure has differing tax treatments. As a business, you are liable for both federal and state taxes. However, these are dependent on the way your business is organized or its business structure. Companies that choose to incorporate as corporations are liable for corporate income tax while partnerships and sole traders can be taxed on a personal level. Currently, corporations pay a corporation tax of 21 percent.
However, shareholders in a C corporate are also exposed to double taxation since they also pay individual income tax on any dividends received. While a sole trader business structure may seem simpler, it also comes with more risk and tax obligation placed on the owner. Your choice of business structure also determines your tax filing date, regulations, and filing forms. For instance, Limited liability corporations (LLCs) have different tax forms, depending on whether you are incorporated as a single or multi-member LLC. Partnerships are required to use Form 1065 to file their annual returns while sole proprietors must use For 1040.
State Laws On Business Incorporation Will Determine Your Options And Requirements
While you can incorporate your business in any state, each state will have differing requirements for business structure incorporation. For those planning on incorporating as a limited company, it is recommended that it is incorporated in the business’s home state. When it comes to classification for taxable income, each state has its own standards. In California, businesses owe taxes if they are considered to be doing business there. Similarly, Nevada is a popular state to incorporate thanks to its extremely low taxation rates. This is because the state does not enforce corporation taxes.
The business law precedents in Nevada are also very simple to understand in business litigation cases. This makes it much more favorable to corporations. Other favorable states for corporations include North Carolina with a 2.5 percent corporate income tax and South Dakota which does not levy corporate income tax nor gross receipts tax.
The Wrong Choice Could Leave Stakeholders Vulnerable
Your choice of business structure can also determine the level of risk shareholders take on – particularly in business litigation cases. Sole traders enjoy fewer government restrictions but also face personal liability- or unlimited liability. On the other hand, for limited liability companies (LLC), liability stops with the business entity. In other words, shareholders stand to lose their investment in the business but not their personal assets. This, however, does not stop the character damage that can come with corporate litigation.
While an LLC can provide some relief from the perils of double taxation faced by corporations, there are also merits of other business structures. While there is a range of options to choose from, it is now more important than ever that business owners take the time to consider their choice of business structure. Their choice can essentially map out the future for their tax function and growth prospects.