The Best Business Entity for Taxes: Sole Prop, LLC or Partnership?

Tabs on colored file folders read: LLC, LLP, C Corp

What type of business entity is right for you?

Most business entities are formed for legal reasons not tax reasons. We do not give legal advice, but with regard to taxes, we want to help you choose the type of business entity for your situation, because it will help you save the largest amount of money possible.

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Sole Proprietors

If you have an existing business or are starting a new business you may want to consider forming a corporation or an LLC.

Most people who go into business for themselves just add an extra page to their individual tax return called a Schedule C to report earnings and deductions from self-employment.

If you form any other type of business entity you will need to file a separate tax return for your business and then report your business earnings on your individual tax return as well. Sometimes this can result in the business getting taxed and then getting taxed again at the individual level.

We can help with tax planning to determine how you can save the most money when deciding what type of business entity is best for you.

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LLCs “Limited Liability Company”

Most business entities are formed for legal reasons – not tax reasons. We do not give legal advice. Check with a qualified attorney to determine if forming an LLC or corporation will offer you greater personal protection.

In California an individual can form a Limited Liability Company and be taxed on a regular individual tax return. (Most people think LLC stands for Limited Liability Corporation. The “C” stands for company.)

Once the LLC is formed it can be taxed as a corporation if the owner thinks that entity offers better advantage.

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Corporations

The most complicated tax entity is the corporation.

Unlike a sole proprietor, corporations must keep very detailed bookkeeping. Sole proprietors can commingle money between their personal finances and the business. If you are doing business as a corporation you must pay yourself wages (W-2).

Corporations cannot use the corporate checkbook for personal expenses. Many small business people have difficulty adhering to this regulation. A small business just starting out may be better off not forming a corporation.

If you decide to from a corporation you will have to make a choice between a “C” corporation or an “S” corporation.

The “S-corp” is taxed as a pass-through, meaning no tax is paid by the corporation. All of the income and deductions are passed-through to the shareholders.

A “C-corp” is taxed at the corporate level and then taxed again at the individual level.

Business owners have to be very careful when considering which type of corporation is best for them.

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Partnerships

If a business has more than one owner they need to operate as a partnership.

Partnerships must file a separate tax return just for the partnership. Then each owner’s share of the income and deductions are reported on the individual tax returns.

Partnership tax returns tell the IRS about your business. All of the taxes are paid on your individual tax return. For this reason, partnership tax return are called a pass-through.

Partnerships can also file for liability protection by forming an LLC with the Secretary of State.

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Summary

We can help you determine which type of business entity is right for you and saves you the most money.

Get a free consult.

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Testimonials

Randy is always available to assist with any questions or troubles that may be encountered with the IRS or California Franchise Tax Board. He has resolved matters and concerns we have encountered in the past, without delay.

RosieGarden Grove

We have complex tax returns every year, and every year, since moving to San Diego, we have trusted this tax preparation service with our complicated returns. Very personable/professional staff and phenomenal knowledge of tax law.

IanSan Diego

Randy has done a great job with our return the last couple of years even with complicated filing. I would recommend Randy to anyone and we gladly make the hour drive from San Clemente down to San Diego to have him handle our taxes.

JenSan Clemente

I ended up with alot of different forms this year in which I though it was going to be a complicated, long and drawn out process. To my surprise Randy was well organized, which I love, and was able to do everything in a one hour session which had not happened in my previous tax years.

LaurenSan Diego

I was referred to Randy by a colleague who said nothing but positive things about her years of experience with him. I have to say I was very impressed. He was organized, knowledgable, professional and provided sound consultation on financial goals I have for the next year.

MichaelVista

Randy prepared the returns for my brother-in-law and his Trust, for which I am the trustee, in less than a week.

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Randy Ames, owner of ABC Tax Service, San Diego

FAQ

What is a Sole Proprietorship?