Question

Each type of business entity is affected by taxation. However, tax rates vary among the many different types of company structures, such as traditional C corporations, S Corporations, partnerships, and LLC. For example, corporations are generally taxed at higher tax rates than sole proprietors.

Respond to the following in a minimum of 175 words: 

Explain the differences in taxing of four different types of organizations. 

If you were going into business and had a choice of business structures to select from that would minimize your taxes, while yielding the highest profits, which would you choose and why? 

Answer 1

Business structure affects many aspects of any entity including the tax obligations and all. Therefore, the business structure must be selected after considering all the legal consequences and future managing the time consuming tax compliances and simplified tax liabilities.

The C Corporation refers to Standard Corporation, while the S Corporation has elected a special tax status with the IRS (Internal Revenue Service). C Corporations are responsible for separate corporate return and paying taxes separately at corporate level thereafter on individual level as dividend to shareholders. While S Corporations are responsible for separate corporate return and paying the taxes at corporate level. Tax on corporate level and individual level both are paid by the owner and they are responsible only for filing informational Federal Return.

Even Partnership Firm must also file information return and not responsible to pay the taxes directly to IRS. This information return includes the computation of Income of Partnership, applicable deduction, and tax dues based on the Income and Loss reported by Partnership. Taxes are paid by partners on the distributed share by Partnership.

Even in case of LLC and Corporations, Corporation and Owners are treated as different legal entity and business’s tax obligation are different from its owners and owners are not responsible for any debts of the corporation due the nature of limited liability of owners and members. Generally, there are higher taxes on corporation than sole proprietorship due to high administrative fees.

Further, IRS also issued various pronouncements called as revenue procedure and revenue rulings for handling the matters relating to these entities and to provide a hassle free tax compliance.