Business Entities Explained: What do legal entities mean in terms of tax?

It’s easy to say “I want to start a business!”

Most of us have a good working knowledge of what this will entail: we offer a product or service, people pay for said product and service, and our income is what’s leftover when all the necessary expenses have been paid.

That’s where things start to get foggy.

Most entrepreneurs know that they’ll need professional accounting services and to declare a business entity, but these two tasks often get shoved to the back burner. As your partner in accounting and bookkeeping services, RQB knows how important the business entity you choose is to your financial future.

Keep reading to learn more about what business entities mean in terms of taxes and how our online accounting services can help you keep everything organized and legal.

What Is A Business Entity?

First, let’s talk about what business entities actually are. The entity, or structure, you choose for your business makes a big difference when it comes to accounting and the type of income tax return for you’ll have to file.

According to the Internal Revenue Services, “The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a business structure allowed by state statute.”

What Type Of Business Should You Start?

Sole Proprietorship – This is the business entity chosen by an unincorporated business that consist of only one person. Sole proprietorships may be liable for income taxes, self-employment taxes, estimated taxes, Social Security and Medicare taxes, Federal unemployment tax, and excise taxes.
Partnership – This is the business entity chosen by two or more people who start a business together. Partnerships may be liable for employment taxes, income taxes, and excise taxes.
Corporation – This is the business entity chosen by those who might like to open their company up to shareholders in the future. Corporations may be liable to income taxes, estimated taxes, employment taxes, and excise taxes.
S Corporation – This is the business entity chosen by corporations that elect to “pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes,” according to the IRS.
Limited Liability Company (LLC) – This is a business entity that is only recognized in select states. The types of taxes required of LLCs depends on the particular regulations outlined by the state in which they’re located.