How Business Structure Can Impact Liability and Taxes

Running a company is hard work. There are so many elements involved and it can be hard to know what laws apply.

Many business owners are concerned about taxes and liability. How will you be affected? It depends on your business structure. Here’s what you need to know.

Liability

When it comes to a sole proprietorship or general partnership, there’s no legal separation between the owner and the business. This means you are personally responsible for all business debts, legal obligations, and potential lawsuits. If the business fails or is sued, your personal assets (such as your home and savings) are at risk.

For corporate structures such a limited liability company (LLC) and corporation (C Corp and S Corp), there is a legal separation between the business and its owner, offering limited liability protection. This means your personal assets are generally shielded from business debts and lawsuits, protecting your home and savings. However, even with an LLC, it’s worth noting that it doesn’t provide the same level of personal liability protection as a corporation.

Taxes

A sole proprietorship is the simplest and most common form of business ownership. It is operated by one individual, with no legal separation between the owner and the business. Because of this, the owner assumes full responsibility for profits, losses, and tax obligations.

All income generated by a sole proprietorship is treated as the owner’s personal income. The business itself does not pay income tax. Instead, the owner reports business income and expenses on their personal tax return.

Sole proprietors are also responsible for paying self-employment taxes, which cover Social Security and Medicare. These taxes are based on the business’s net earnings and are reported on Schedule SE, filed alongside the personal tax return.

A partnership is another common business structure, where two or more individuals share ownership. Partnerships are subject to “pass-through” taxation, meaning the business itself does not pay income tax. Instead, profits and losses are passed through to the partners, who report them on their personal tax returns. Key tax elements include:

The partnership files an informational return, but it does not pay taxes directly. Each partner receives a Schedule K-1, which reports their share of the partnership’s income, deductions, and credits. This information is then included on the partner’s personal tax return.

However, there are different types of partners General partners are considered self-employed and must pay self-employment taxes (Social Security and Medicare) on their share of the partnership’s income. Since these taxes are not withheld, they are typically paid through quarterly estimated payments. Limited partners are usually exempt from self-employment taxes on their share of partnership income.

Learn More About Corporate Law

Corporate law rules dictate liability, taxes, and more. It’s important to understand how these laws affect you and your business.

Protect your business with help from Orlando corporate law lawyer B.F. Godfrey from Godfrey Legal. We provide experienced representation designed to help you find efficient and cost-effective resolutions to any legal situations that may arise. Schedule a consultation today by filling out the online form or calling (407) 890-0023.

Source:

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