By: Kerri Tassin
A recent online article titled “7 Cities You Didn’t Expect To Be Great For Business” in Forbes magazine listed Springfield, Missouri as a great location in which to start a new business or expand an existing business. The author of the May 15, 2017 article, Brian Rashid, cited Springfield’s low labor and tax costs as reasons to launch a business in our hometown. So if you’ve considered starting a new business in the area, you’re probably in great company.
As you prepare to hang your shingle or open your shop doors, you’ll need to give serious consideration to the type of structure your business should take. In other words, what business entity would best suit you and your business? Entrepreneurs should take into account both tax and nontax factors when making this important decision. Both the U.S. Small Business Administration and the Internal Revenue Service provide information online regarding some of the tax and nontax factors to consider. In this article, we’ll take a look at a few of the choices for business entities, and some of the tax-related factors you may need to discuss with your trusted professional adviser as you make this determination.
Perhaps you plan to start a business with one or more other people. You may consider structuring your jointly owned business as a partnership. For tax purposes, partnerships file a Form 1065 each year at tax time to report revenue, expenses, and other items such as partner contributions and distributions to and from the partnership. A partnership is considered a pass-through entity for tax purposes because each partner’s share of income or losses flow through to the partners’ individual tax returns and is taxed at individual tax rates.
Business owners may instead choose to incorporate and file tax returns as a corporation. A traditional corporation files its own tax return on Form 1120. Revenue and expenses are reported on the return, and the corporation pays taxes on any net income at corporate tax rates. Alternatively, a qualifying corporation may instead elect S corporation status and become a pass-through entity. In this case, similar to a partnership, the shareholders’ share of income or loss flows through to their individual tax returns and is taxed at the shareholders’ individual tax rates.
Finally, according to a July 2016 online Forbes magazine article by Tom Taulli, titled “When To Form An LLC,” most businesses in the early stages will form as LLCs. Business owners would do well to discuss the tax implications of the choice to structure as an LLC with a professional adviser, as the owner will have some decisions to make regarding how the business will be taxed. For example, according to the “Business Structures” page on the Internal Revenue Service website, LLCs may be taxed as corporations, partnerships, or sole proprietors (“disregarded entities”).
The material in this article is for general informational purposes only and does not constitute tax or legal advice. Please consult with your own tax adviser regarding your personal tax situation.
Assistant Professor Kerri L. Tassin, CPA, JD teaches tax accounting classes in the School of Accountancy at Missouri State University.
Scott A. Hodge, The U.S. Has More Individually Owned Businesses Than Corporations, https://taxfoundation.org/us-has-more-individually-owned-businesses-corporations/.
Internal Revenue Serv., Business Structures, https://www.irs.gov/businesses/small-businesses-self-employed/business-structures.
Brian Rashid, 7 Cities You Didn’t Expect To Be Great For Business, Forbes, May 15, 2017, https://www.forbes.com/sites/brianrashid/2017/05/15/7-cities-you-didnt-expect-to-be-great-for-business/#4a5f0fb1590d.
Tom Taulli, When To Form An LLC (Limited Liability Company), July 24, 2016, https://www.forbes.com/sites/tomtaulli/2016/07/24/when-to-form-an-llc-limited-liability-company/#49aed0804e0d.
U.S. Small Business Administration, Choose Your Business Structure, https://www.sba.gov/starting-business/choose-your-business-structure.
This article appeared in the September 23, 2017 edition of the News-Leader and can be accessed online here.