As a small business owner, you know that businesses can owe a lot in taxes. Of course, you want to keep that as low as legally possible.
Business entities, or business structures, can play a part in tax liability – but how much do they matter?
At CSI Accounting & Payroll, we’ve worked with small business accounting for over 50 years. During that time, small business owners have wanted to know a lot about business entities and taxes, such as:
- How much do business entities affect tax liability?
- How can I lower my small business’s taxes?
- How does each business structure affect tax liability?
How Much Business Entities Affect Taxes
Before we get into which business entity can save you the most in taxes, let’s acknowledge just how much business entities can affect your tax liability.
Business entities matter, but they’re not everything. It’s also not that one business entity is better at saving taxes than the others; it’s that choosing the best entity for you will save you the most.
We like to say that minimizing tax liability is about 20 percent choosing the right business structure and about 80 percent using a complete, year-round tax strategy consisting of tax planning, projections, and preparation.
How to Lower Business Taxes
As we mentioned in the section above, a complete tax strategy that runs throughout the year is extremely important for minimizing tax liability.
What you owe in taxes is not fully in any accountant’s hands, but different types of accountants have different tax-lowering abilities.
When choosing between annual tax accountants or monthly accountants, you should know that only monthly accountants can work on client-specific tax strategies year-round. They have a whole year to help you make the best business decisions.
Annual tax accountants might say they have a tax strategy by trying to claim credits and deductions at tax time, but most of what they do is record the history of your prior year. We all know you can’t rewrite history.
Ultimately, owing taxes mostly just means you made a profit. It’s not all bad! Just choose the right accounting solution to keep those taxes as low as legally possible.
How Each Business Structure Affects Tax Liability
Finally, let’s get into the different business entities and how taxes are applied to them.
Remember, there’s no single entity that’s best for taxes; it’s choosing the best entity for your business that will benefit you the most tax-wise.
Your business entity can also change! If you work with CSI Accounting & Payroll, we examine your structure during onboarding, as well as around once per year or after a large change in your business.
Sole Proprietorships
Sole proprietorships are owned and operated by one person, and it’s not legally separate from the owner.
You’ll want to remain a sole proprietor if you’re a single owner with zero to two employees and minimal profits. Generally, though, tax savings are limited.
Some tax advantages for sole proprietors include:
- Deductible medical, home office, and personal vehicle expenses
- SEP (Simplified Employer Pension) retirement plan deduction
- Tax savings for employees who are family members
Partnerships
Partnerships have two or more individuals or entities as owners. This structure is beneficial when you hold property or other non-operating assets (stocks, bonds, securities, etc.).
Partnerships have a lot of the same benefits as sole proprietorships.
Some tax advantages for partnerships include:
- Customizable benefit structure (profits-only, capital partners, etc.) to divvy up assets in the operating agreement
- Taxed at the owners’ personal tax rates
- QBID (Qualified Business Income Deduction)
S-Corporations
Most of CSI Accounting & Payroll’s clients are S-Corps. A simple way to think about an S-Corp is to remember “SMALL-Corp.”
To be an S-Corp, you need to have less than 100 shareholders, all shareholders must be U.S. citizens, and you cannot be publicly traded on the stock exchange.
This business entity debatably has the best all-around tax savings, although it may be lacking a little in medical benefits.
Some tax advantages for S-Corps include:
- Not subject to Medicare and Social Security taxes
- Distributions not subject to double taxation
- Owners can contribute to retirement accounts to reduce taxable income
- Taxed at the owners’ personal tax rates
- QBID (Qualified Business Income Deduction)
C-Corporations
C-Corps – or “Common Corporations” -- have no limit on shareholders, can include non-U.S. citizen and entity shareholders, and can be publicly traded on the stock exchange.
Mostly, this structure is only beneficial to very large businesses.
Some tax advantages for C-Corps include:
- Write off 100 percent of charitable contributions
- Best benefits for owners, such as a medical plan that’s 100 percent paid for by the business
Minimize Taxes With the Best Structure and Tax Strategy
Now that you know about how business structures and year-round tax strategy help you keep your business taxes as low as legally possible, are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about the cost of monthly accounting by clicking the image below:
