Our Two Cents on Different Types of Companies and Their Tax Concerns

April 12, 2013

Whenever a budding entrepreneur comes to us looking to us for help as a Rochester CPA, one of the first questions we have to ask has to do with how he should establish his business. This question is not related to operations and other forms of advice but the type of business entity he should form.

Usually, the question is directed straight at tax planning in the sense that he wants to know how he would be paying taxes if he was establishing a particular type of business. At this point, we have to embark upon the basics of how different types of organizations pay their taxes. Well, we have decided to jump the gun and give our two cents worth on this subject.

If you are looking to establish a business then you need to pay close attention to the following information. However, the fact that we are giving away this information does not mean that we would cease to explain the basics to our new clients. On the contrary, we invite you to ask us if you want to know more details of the following.

Sole Proprietors

Most small to medium startups are based on this kind of ownership model, especially if the entrepreneur has a decent amount of capital to work with. In simple terms, such models have one individual as the sole owner. Sole proprietors, hence, pocket the profits and the losses.

An individual who is running a sole proprietorship would need his Rochester consulting firm to file a Schedule C. He would be paying income tax as well as the self employment tax on his total profits to the tune of 15.3 percent.

Small or medium sized fledgling sole proprietorships are recommended to choose the CFO outsourcing model of accounting because their requirements are not as extensive.

Partnerships

Partnership organizations are usually established by two or more entrepreneurs in collaboration with each other. The two people take equal responsibility for the debts and profits of the organization in question. For partnership organizations, there is a special Form 1065 which needs to be filed.

Moreover, any earnings of the business that are passed on to the partners of the organization would be liable to Rochester taxes. This means that each partner has to pay separate income tax and self employment tax.

Corporations

There are two types of corporations in the form of S corporations and C corporations. S corporations would pass on their incomes to individual shareholders who will pay their income Rochester taxes but will avoid self employment taxes. C corporations, on the other hand, will file for corporate returns and pay income taxes.

LLC Entities

LLC entities have various options in that they can choose to be treated as partnerships or corporations. Even so, LLC members would need CFO outsourcing for paying all their taxes including income Rochester taxes and self employment taxes.

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RDG+Partners wants to be the primary advisor for motivated business owners. The firm is committed to providing boutique level accounting, tax and business consulting services to the Rochester, NY community.