Ways in which Business Structure Affects Taxes

A business entity is an organization that is created by either one or more natural people to carry out trade or business. In India, the business entities are created at the state level by filing documents through the online portal of the Ministry of Corporate Affairs. The types of business entities legally approved in India include proprietorship, Nidhi companyprivate limited companieslimited liability partnerships, etc.

Mentioned below are common types of Business Structures in India:

Sole Proprietorship

The Sole Proprietorship is the easiest and simplest form of business where only the one person owns and runs the whole business, that respective owner is the only one who bears all the profits and the losses the company does. There will be no sharing of profits and loses. Therefore, there is no legal distinction between the owner and the business entity.

Partnership

The partnership is the second Business Structure in which it is considered that it is an agreement between two or more parties that are willing to start a business legally. In the partnership form of business, all partners have to sign a Partnership Deed which contains all the information about the all the partners and about the company.

S corporation

The S corporation is more attractive Business Structure to small-business owners than a regular (or C) corporation. That’s because an S corporation has some attractive tax benefits and provides business owners with the liability protection of a corporation. In S corporation, profits and losses pass through to shareholders which are in their individual tax returns. As a result, there’s just one level of federal tax to pay.

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Limited Liability Companies

The Limited Liability Company is a profit giving type of a Business form that combines pass-through taxation of a partnership firm or the sole proprietorship with a limited liability. The LLC is not a corporation of its own rather it is a legal form of a company that gives limited liability to its owners in many jurisdictions. These types of companies are well-known for the flexibility that they provide to business owners but after depending on the situations, an LLC may opt to use corporate tax rules instead of being treated as a partnership firm, and under some certain circumstances, LLCs may be organized as a not-for-profit organization.

Tax implementation on the above-mentioned Business structures :

  • For Sole Proprietorship

In the sole proprietorship Business Structure, there is no distinction between the owner and the business and there is only one owner who is all in one responsible for the losses and the gains that the organization will bear. So the owner is only responsible for the debts, losses and the liabilities. Hence the business and the personal taxes are not separate because the income earned by the business is the income of the Sole Proprietor.

  • For Partnership

In the Partnership type of Business Structure, two or more people share ownership of the organization. They share all the profits and the losses in the equal ratio. However, The ratio is already set by the partners in the partnership. There are 3 types of partnership the joint venture, limited partnership and the general partnership.  Hence all the partners in the company must file the return on the income gained from the business. The file for the taxes personally on there share of income in the business.

  • For Limited Liability Company

In the Limited Liability type of Business Structure as it is a hybrid between the corporation of the partnership firm. All owners are the “Members” of the organization. However, The member can be the single owner or the many members or in partnership. All the profits gained and the losses incurred are passes through to all its members of the organization. As well as the partners have to file for their taxes on their personal returns. But several states also require the state taxes which requires special care while filing for the taxes.

  • For S Corporation

In the S Corporation type of Business Structure is the most attractive form of small business. The S Corporations allow all profit and losses to pass through to personal tax returns which avoid double taxation.

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By | 2018-08-07T10:59:04+00:00 June 30th, 2018|Taxation|Comments Off on Ways in which Business Structure Affects Taxes

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