Entity Selection & Taxation for your Business!

Zachary Runyan, CPA
Jun 7
2 min read

Updated: Jun 9

This article is to provide you with some high-level information about general entity selection for your business as well as the basic tax implications. This is not meant to explain every little detail but should help you along your journey.

One entity that you could select would be a sole proprietorship which is taxed at individual level without any protection or separation from your personal assets.

Other entities that you could select with some protection (FYI this is not legal advice and there are many considerations for selecting a legal entity):

Corporation
Limited Liability Company (LLC) - Single member or Multi member
Partnership (LP, LLP, LLLP)

Corporations create bylaws outlining how the business manages itself.

LLC’s and partnerships typically create operating agreements outlining how the profits and losses are allocated, issues within the business are dealt with, and who owns and manages the LLC or partnership.

Both documents are not required in all states, but they are still very important.

Initial capital contribution is important to not only fund your business, but to put separation between the business and individual owner. Part of the reason of selecting an entity other than sole proprietorship is to provide some level of protection from your personal assets. Contributions of property are generally tax free but could be taxable based on your situation.

Overview of Federal Tax Classification of entities (default classifications)

Corporation

C Corporation (files corporate return - taxed at entity level)
S Corporation (files corporate return – taxed at individual level)

Limited Liability Company

LLC Single member (disregarded entity aka taxed at individual level)
LLC Multi member (files partnership return, taxed at individual level) *see note about husband/wife multi member LLC's

Partnership (files partnership return, taxed at individual level)

* Community property states treat LLC multi member owned by husband and wife as disregarded entity (taxed on individual return. Common law states treat LLC multi member owned by husband and wife as partnership.

LLC’s and partnerships may elect to be taxed differently (must be done timely to be effective in desired tax year); these elections include:

C Corporation
S Corporation
Partnership

Some passthrough income (based on your entity type) is taxed at the self-employment rate. Each type has different requirements and should be evaluated carefully.

If you need help, we provide the service to register your entity, set up a registered agent, register your EIN, and set up operating agreement/bylaws. We can also manage your accounting/bookkeeping/payroll for you! If you are interested in the services we can provide, then check out our Service List.

For more information, please reach out and book a meeting to get started! Click here to book a call or call 719-285-7554.