Business formation can impact your taxes

Business formation can impact your taxes

| Jul 16, 2021 | Hawaii Business |

People put a lot of time and effort into starting a new business. They do market research, test prototypes and buy ad space. But sometimes, entrepreneurs neglect to consider one of the key factors in any business: the way it’s structured. Businesspeople in Hawaii should carefully consider the benefits of business structures like sole proprietorships and LLCs before launching.

LLCs and taxes

Limited liability companies provide their owners with some protection when it comes to liability. This is an important advantage over sole proprietorships. But LLCs can also have significant tax benefits associated with them.

There are some basic ground rules about taxation and LLCs in business law. The IRS will automatically tax an LLC owned by an individual in the same way as a sole proprietorship. LLCs with more owners, or partners, are taxed as if they were structured like partnerships. However, the owners of an LLC can ask the IRS to change their tax structure.

C corporations and S corporations

The owners of LLCs can change their classification to a C corporation or S corporation. C corporations pay taxes on the income they generate. The members also pay taxes on the income they make from the LLCs. S corporations don’t pay taxes in their own right at all: it’s a pass-through structure. Instead, members pay taxes on the corporation’s income as if it is their own.

If you are thinking of founding a business, it’s important to consult with an attorney. A lawyer may be able to help you understand the benefits of different LLC structures for your company. By following their advice, it’s possible you could save some money at tax time.