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Posted by: Charles P Myrick CPA Posted on: Feb 21 2017 Posted in: tax planning and preparation, small business

How Your Business Entity Affects Tax Planning and Tax Records

It's tax season, and small business owners are reminded how the business entities they choose determine the amount of taxes they pay. Also influenced by the type of business entity is the amount and type of tax records required for tax filing. Business owners have several options for forming a business entity. Whether you are starting a business or thinking about making a change to your structure, it's a good time to take a look at the options.

Sole Proprietorship

A sole proprietorship is the most basic of the business structures. You can choose this option if you are running the business by yourself, without partners. Sole proprietorships are easy to form, and they don't have complicated tax codes that can give you headaches. In fact, your business taxes will pass through to your personal taxes.

You also don't have to file much paperwork to form a sole proprietorship. While this entity has many benefits, it also has a serious drawback. If you form a sole proprietorship, you won’t have any liability protection. In other words, your customers can sue you. Your business structure will not protect you.


Partnerships are the next step up. These are very similar to sole proprietorships, but instead of running the business by yourself, you will run it with a partner.

Limited Liability Company

For those who want to create an entity that is separate from the owners, consider a limited liability company (LLC) which is one of the most popular entities for small businesses. You can open an LLC if you are working by yourself or with partners. In fact, there aren’t limits regarding the number of owners.

The LLC owners are taxed similarly to a sole proprietor or a partnership. Your profits and losses are recorded on your personal tax forms. Since your personal assets and business debts are separate with an LLC, you have protection from lawsuits.


If you choose to structure your business as a corporation, then it is important that you understand the differences between an S-Corp and a C-Corp. There are advantages to both of these types of corporations, and you need to consider the tax needs of your company. Both of these structures offer liability protection for shareholders, keeping the business assets separate from the individual assets.

Choosing a business entity is an important decision for long term tax planning, so consider seeking outside help. A business advisor will take the time to learn about your situation and help you decide which is the best business entity for your needs. That way, you will have the protection and benefits that you need for your business. 

Download Free Guide to Business Entities

Charles P Myrick CPA, Washington DC tax preparation firm, specializes in accounting services for small business start ups and entrepreneurs. If you are a new entrepreneur, give us a call. We invite you to learn more about the small business accounting services that are available: (202) 789-8898.