The Tax Implications You Must Consider When Structuring Your New Business

The Tax Implications You Must Consider When Structuring Your New Business

So you'd like to start a new business? Perhaps you have an excellent idea for a new product or service, or you think you can improve upon something that already exists. Either way, you expect to grow quickly, and you'd like to register your business right away.

But before you even register your business with the state, it's already time to make some decisions that will affect how much you pay in taxes. You can indeed change the structure of your business in the future, but you do risk complications like tax penalties and the possible dissolution of your existing company. Ideally, you will select the best possible business structure for your particular situation when forming your company.

The Most Common Business Structures

You are most likely choosing between:

  • Sole Proprietorship
  • Partnership (LP, LLP)
  • Limited Liability Company (LLC)
  • Corporation (C Corp, S Corp, B Corp, Nonprofit Corporation)

As you make your selection, keep in mind that each business structure's ownership rules, liability, taxes, and filing requirements vary by state. You may want to consult with an attorney, business advisor, or accountant before you decide.

Sole Proprietorship

A sole proprietorship means that a single person owns the business. This is easy to set up and gives you complete control of your business dealings. However, your business assets and liabilities are not separate from your personal assets and liabilities - you are essentially one with your business. On the plus side, you are only taxed at personal income tax rates, so there are no corporate taxes or self-employment taxes to consider.

Taxes: Personal Income Tax


Partnerships are formed between two or more people and are often a Limited Partnership (LP) or Limited Liability Partnership (LLP). 

An LP means that one owner holds the general liability for the business, while all other partners have limited liability. The limited liability usually comes with limited control, outlined in a partnership agreement. Partners pay personal income tax on their profits, and the partner with the general liability also pays self-employment taxes.

An LLP is similar to an LP, but each owner has limited liability. This keeps one partner from sabotaging the others.

Taxes: Personal Income Tax, Self-Employment Tax (partner with general liability only)

Limited Liability Company

LLCs remove personal liability, allowing owners to protect their personal assets if their business faces a lawsuit or bankruptcy. Business owners pay profits and losses through personal income without paying corporate taxes. But an LLC member is considered self-employed and must pay self-employment tax contributions towards Medicare and Social Security.

Taxes: Self-Employment Tax, Personal Income Tax or Corporate Tax


C Corp

A corporation is also called a C corp and is a legal entity that is separate from its owners. A-C Corp can profit, be taxed, and be held liable. Corporations are more expensive to form and are required to report more extensive record-keeping and operational processes.

Corporations pay income tax on their profits. Sometimes, corporate profits are taxed twice: first, when the company makes a profit, and second when dividends are paid to shareholders on their personal tax returns.

Taxes: Corporate Tax

S Corp

An S Corp is a special type of corporation specifically designed to avoid the double taxation of regular C corps. S corps allow profits, and some losses, to be taxed as an owners' personal income without being subject to corporate tax rates. However, not all states tax S corps equally, and not all states recognize an S corp designation.

Another differentiation with an S corp is that they must register with the IRS, not just with their state.

Taxes: Personal Income Tax

B Corp

A benefit corporation, or B Corp, must show that they have some kind of positive contribution to the public but can still operate as a for-profit corporation. However, they are taxed the same way that a C corp is.

Taxes: Corporate Tax

Nonprofit Corporation

Nonprofit corporations are explicitly organized to do charity, education, religious, literary, or scientific work and can receive tax-exempt status. This means that they don't pay state or federal income taxes on any profits.

In addition to registering with the state, nonprofits must file with the IRS to get tax exemption.

Nonprofit corporations are limited in what they do with any profits they earn. They cannot distribute profits to members or political campaigns.

Taxes: Exempt

There will be various factors to consider when you form your company, but taxes will certainly be an important one. Especially as your company grows, the amount of taxes you pay can become staggering.