Unincorporated businesses may be missing out on tax breaks
In the eyes of many small business owners, the corporate world is the realm of massive conglomerates such as Microsoft and General Motors. To be successful and hold the line financially, however, tax experts agree that even the smallest of businesses may benefit by incorporating.
An S corporation, as defined by the Internal Revenue Service, must be a domestic corporation that consists of no more than 100 "allowable shareholders" — including individuals, certain trusts and estates. It may not include partnerships, other corporations or non-resident alien shareholders. It may offer only one class of stock. S corporation rules require the shareholder employees are paid wages on a Form W-2 and the corporation is liable for payroll taxes.
C corporations, also known as general corporations, have no restrictions on the number of shareholders. The website Active Filings explains that corporations identified with large public stock offerings typically are C corporations. It notes that each shareholder's personal liability is normally defined by the amount of his investment.
"A Limited Liability Company (LLC)," the IRS website explains, "is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation." An LLC can be classified as an S corporation or as a partnership for income tax purposes. If the LLC is taxed as a partnership, the income from Schedule K-1 is shown on Schedule E and is not subject to self employment taxes.
“New businesses are not usually aware that the self-employment tax is coming at the end of the year, so it can be a real shock,” says Richard Chapo, a San Diego tax attorney.