Tax law and how business formation influences what is paid

On Behalf of | Aug 28, 2020 | Firm News |

For Californians who are starting a business, one of the most important decisions is what entity type to use. There are myriad factors to consider when making that determination, not the least of which is tax law. Of course, there are obvious points to think about such as the type of business it is, the goals, how many people are involved and much more. Having legal guidance can be essential for all aspects of starting a business.

The different types of business formations

Prospective business owners have the choice of a corporation, a limited liability company (LLC), a limited partnership (LP), a general partnership (GP), a limited liability partnership (LLP), and a sole proprietorship. All have different tax implications that should be understood.

A corporation is separate from its owners shielding them from personal liability. Taxes will be assessed for the corporation and its shareholders. For a business that is larger and more encompassing with a wide range of people involved and stock implications, this may be the road to take. An LLC is comparable to a corporation, but is taxed in a different way. The entity itself does not pay federal tax, but its members will. There are franchise taxes that must be paid in the state.

An LP has a controlling partner and a limited partner whose responsibility is based on the level of control he or she has. The limited partner is responsible for the debts based on their investment and will not be deeply involved with the activities. The general partner is fundamentally responsible. The general partnership has at least two people who are taking part in the business. All are jointly responsible for its obligations and any profit will be taxed personally. An LLP is generally limited to accountants, lawyers, architects and similar businesses. It is not individually taxed as a business, but there is a minimum franchise tax. Finally, a sole proprietorship lets a person set up his or her own business and run it. Taxes do not need to be filed separately in the state. It is all done on the personal tax return.

Experienced legal help for forming a business with tax considerations

Tax implications can be challenging when forming a business. Depending on the circumstances and the business structure, it may be imperative to select a certain business type over another option. When making these crucial assessments, it is useful to have experienced legal assistance from a firm that understands business and tax law. A consultation can yield information and provide help.