Question

Does the size of you business matter which structure is best from a tax perspective? What are your thoughts?

Answer 1

The size of a business refers to the scale of operations, level of production and volume of sales. Different businesses have different sizes.The size of a business is affected by various factors and so does the business structure. According to size, there are different business structures of which some common ones are as follows :

1. Sole Proprietorship - Most common form of business. The size of this can be generally small as the capital is contributed by the owner itself and the profits are taxable in his hands only. All profits or gains are shown in personal tax return. Self-employment taxes will also be paid.

2. Partnership - Two or more partners come together to do business. They contribute their capital and is much more like sole proprietorship i.e. profit/loss from partnership is taxed in the personal tax returns of partneers by including form K1.

3. Corporation - It raises capital by issuing shares i.e. shares are offered to public and capital is raised. Any amount of capital can be raised and the income is taxed in the hands of shareholders i.e. Dividends distributed. The profits are taxed in the hands of corporation first and then in the hands of shareholders when dividends are distributed.

4. Limited Liability Partnership - It is same as partnership but partners have limited liability i.e. their personal assets cannot be attached.

No business is the best from tax perspective. Any business will have to pay taxes on profits earned. The scale of business one wants to have will solely decide the taxes. There may be a time when taxes might be the same from all business structures.