Tax Strategies for Business Owners

The legal form you choose for your business affects how much tax you pay, how much personal risk you carry, how much paperwork you handle and how easily you can bring in partners or sell later. There is no single best answer. The right choice depends on your goals, your industry and your plans for growth.

The Main Options

Sole Proprietorship

This is the default if you work for yourself and do nothing else. It is simple and inexpensive. Income and expenses go on your personal return, and you pay self-employment tax on net earnings. The drawback is that you and the business are legally the same, so you are personally responsible for its debts and legal claims.

Partnership

Two or more owners share profits and losses. The partnership files an information return, and each partner reports a share on a personal return. General partners can be personally liable for the business's obligations, so a written partnership agreement is essential.

Limited Liability Company (LLC)

An LLC separates your personal assets from most business liabilities and is flexible about taxation. By default, a one-owner LLC is taxed like a sole proprietorship and a multi-owner LLC like a partnership, but an LLC may elect to be taxed as a corporation. Georgia has its own filing and annual registration requirements.

C Corporation

A C corporation is a separate taxpayer. It pays tax on its profits, and shareholders pay tax again on dividends. That double layer is a drawback for many small firms, but C corporations can suit businesses that plan to raise outside investment or retain earnings for growth.

S Corporation

An S election lets a qualifying corporation or LLC pass income through to owners, avoiding the corporate-level tax. Owner-employees must be paid reasonable wages, and payroll tax applies to those wages. Distributions beyond wages are not subject to self-employment tax, which is why S status is popular. There are limits on the number and type of shareholders and on classes of stock.

Questions to Ask Yourself

• How much personal liability am I comfortable with, and what insurance can cover it?
• Will the business be profitable soon, or will early losses be useful on my personal return?
• Do I plan to take on partners, hire a team or seek investors?
• Do I want to take profits out each year or reinvest them?
• How much administrative work and cost can I handle?

Plan for Change

Many businesses start simple and change structure as they grow. Converting later can have tax consequences, so it helps to think ahead. A structure that is easy to set up may be costly to unwind.

If you are starting a business or reconsidering your structure, see our business formation services or contact us to talk through your options.