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How does business structure impact taxes?

On Behalf of | May 16, 2023 | Business

Business in California is booming. The State of California Employment Development Department states that during the second quarter of 2022, there are over 1.6 million businesses in the state. These range in size from having 1 to over 1,000 employees.

Those who are looking to start a business, whether small or large, need to have an important conversation: What business structure is right for my business?

Business structures and tax obligations

Business owners are wise to take their time when choosing a business structure. Thorough due diligence is important, as this choice will impact your business in many ways. Arguably, one of the most important involves taxes. Some examples of common business structures and the related tax obligations include:

  • Sole proprietorship. The most basic option, this involves a single owner with total control. The owner gets all the business profits and is responsible for the business’ tax obligations.
  • Partnership. There are different partnership options in California. These include the Limited Partnership (LP), General Partnership (GP), and Limited Liability Partnership (LLP). Taxation can vary depending on which structure is chosen but the owners are generally responsible for the business’ tax obligations.
  • Limited Liability Company (LLC). The Internal Revenue Service (IRS) generally taxes either the individual if a single owner LLC or multiple owners as a partnership.
  • Corporation. Taxes are two-fold and apply to the corporation and the shareholders.

It is also important to note that there are various types of corporations. These allow for business owners to focus in on specific goals and will further impact tax obligations.

One more note to consider

Taxes are just one part of the conversation. The ability to raise funding and the potential need for liability protection are also important parts of this decision.