Greetings! Welcome to this edition of Talking Dollars & Cents. Today I wanted to dive into a subject I’m frequently asked about: What is the tax benefits, if any, for being a pass through entity? This decision is rooted in several factors that we’ll touch on.
One of the first decisions every business owner makes is how to structure their business.This actually involves two separate decisions.
First, you have to decide on the best legal structure for your business. Then you need to decide how the business should be taxed.
When it comes to taxes, most small business owners choose a pass-through business structure. In fact, 95% of businesses in the U.S. are pass-through businesses, largely due to the benefits of pass-through taxation.
What Is a Pass-Through Business?
Pass-through businesses encompass different business structures, each with different advantages and requirements, all of which require action by the owners.
• Sole proprietorship. A sole proprietorship is the default business structure for a business owner with no partners. Freelancers and independent contractors who perform business activities and haven’t filed paperwork with their state to become an LLC or incorporate–are sole proprietors by default. Sole proprietors don’t have to file separate tax returns for the business. Instead, the owner reporting the business’ income and expenses on Schedule C, Profit or Loss From Business, attached to their personal tax return, Form 1040, U.S. Individual Income Tax Return, pays income taxes and self-employment taxes on all business profits.
• Partnership. A partnership is the default business structure for businesses with more than one owner. Partnerships file a tax return using Form 1065, U.S. Return of Partnership Income. However, the partnership doesn’t pay federal income taxes directly. Instead, each partner receives a Schedule K-1, which they use to report their share of the partnership’s taxable income on their personal tax returns.
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Thank you for reading Kinji Ridley’s article on scoopnewsusa.com. For more on “What are the benefits of Pass-Through Taxation”, please subscribe to SCOOP USA Media. Print subscriptions are $75 and online subscriptions (Print, Digital, and VIZION) are $90. (52 weeks / 1 year).
