Let’s look at the tax differences between different business structures, including sole proprietorships, partnerships, LLCs, S Corps, and C Corps. Sole Proprietorship A sole proprietorship is one of the easiest businesses to form and you, as the sole proprietor, carry all the assets, liabilities, and responsibilities of your business. However, you can't sell stock in your business as a sole proprietor, and banks are hesitant to lend to you. With sole proprietorships, you don’t even need to register the business with the IRS. You can just use your personal Social Security number for the business tax ID. The profits from the business are not “paid” to the sole proprietor in wages, they are just included in the total amount of personal income tax that is applicable on the taxable profits of the business. Many freelancers, independent contractors, and consultants fall under this business structure, which means that if you are a business that operates as or uses contractors, you will need to request or file the proper forms, like the 1099-NEC, when reporting income. Partnership A partnership is formed when two or more individuals want to create a business together. They can either be limited partnerships (LPs) or limited liability partnerships (LLPs). Limited partnerships have one general partner with unlimited liability, while the other partners have limited liability pertaining to the business. The partners with limited liability also generally have less control over the business. With limited liability partnerships, everyone has limited liability. It protects everyone from debts against the partnerships and actions of other partners. In regard to taxes, partnerships are very similar to sole proprietorships, with a few additions for the multi-owner status. The profits don’t have to be split equally between partners (something you should discuss before entering a partnership agreement). This also means that, like sole proprietorships, all …
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