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Choosing the best structure for your business most of the time depends on these two reasons: legal liability- obtaining the best protection from liabilities from general business that can threaten both your business and family assets and tax considerations- obtaining the best tax breaks from your chosen business entity.
These basic guides will help you decide the structure of your business that will serve you best during tax time.

Saving Taxes through your Business Entity

The success or failure of the operation of a small business can be influenced profoundly by confiscatory tax laws. With the complexity of the tax laws, owners of business startups think they can never maximize their available option without giving away to the tax professional the strategy planning. But, with an ever-changing environment, even tax professionals find themselves at odd in choosing the best tax saving-options.
Each business entity has it owns advantages and disadvantages. You just have to understand some fundamental tax concern that differs each type of business entity.

Sole Proprietorship

In setting up a business operation, sole proprietorship is the fastest and easiest way to do it. Specific costs and blanket prerequisites are not necessary. All you have to attend to are some formalities which include getting an occupancy permit for the location of your business, acquiring business license and applying for franchise or registration numbers that will be used by agencies in monitoring the collection of sales taxes as well as other regulatory matters. Assistance of a lawyer or an accountant is not necessary in doing these simple procedures.

Sole proprietorship means you are the sole owner of the business. Full control and responsibility on the business all lies n your hand.

General Partnership

Similar to a sole proprietorship, general partnership would only require a relatively easy process. Cost or formalities are not required. However, a detailed partnership agreement draft would be necessary for the following reasons:
• Contribution of each partner as capital of the business
• Each partner’s right and responsibilities
• Sharing of profits and losses
• Cash withdrawals’ and salaries’ authorization
• Resolving of disputes or having new partners
• The process for dissolving the partnership, when dissolution comes to a need

Limited partnership

There is only one fundamental difference between general partnership and limited partnership- law protection for limited partners. The amount of the investment of a limited partner is also the limit of her or his legal liability in the business. With this protection from law, a limited partner can share in the profits of the partnership while avoiding being exposed to the business’ debts if in case the company goes down. This protection will continue given the fact that the limited partner has no active participation in the operation of the partnership.

Corporation

A corporation is considered an artificially created legal entity because its shareholder is not legally liable for the corporation’s action. A corporation exists separately apart form those who runs it and even from those who created it. A corporation can be formed with as few as one incorporator by simply filing an application where the incorporator will state these facts:
• Corporation’s purpose
• Incorporators’ name and address
• Capital stock’s amount and type which the corporation will be authorized to issue
• Holder of each class of stocks’ right and privileges

In certain situations, operation of a corporation has its share of drawbacks like extra record keeping requirements, administrative details and the last thing that a business owner needs- an additional tax burden.
A corporation however, is an attractive transportation for carrying on a business for these three reasons:

• Unlimited life- for as long as its closure is not stated, a corporation can go indefinitely to accomplish its goal, merge with other business, or even becomes bankrupt.
• Transferability of shares- in a corporation, ownership can be sold, transferred or given away to members of the family. Though, changing the business structure from a corporation into a proprietorships and partnerships would be costly.
• Capacity to increase investment capital- with the limited liability and the easy transfer of shares, it is much easier to pull investors towards your corporation.

Ordinary corporation or C corporation has the biggest disadvantage of dreaded double taxation. Meanwhile, Corporations under the subchapter S of the Internal Code also known as S corporation permits the pass through of income to the individual shareholders, that is why many business owners choose to operate under this type of corporation.

Limited Liability Company (LLC)

This is another viable alternative aside from the S corporation. It is a type of entity that has a legal protection of a corporation and has the capability to be taxed like a partnership. Aside from insurance, banking and some professional service operations, other type of businesses as long as it is lawful, can form an LLC. This is the preferred choice in situations where:
• The primary concern is the protection of legal liability
• The owner prefers a simplified “one time” tax
• Qualifying for subchapter S status is not possible