Taxation Differences Between Small and Large Businesses
Taxation is a guaranteed occurrence for organizations, no matter the size. However, tax implications are quite different. Small Businesses, in comparison to large organizations, deal with very different markets and niches. Small businesses are an essential backbone of any economy. Many individuals are employed by such an organization, and may also provide services in areas not catered to by larger contemporaries. As such, taxing both small and large businesses equally do not make sense. Complexities may also emerge with how shares are split amongst owner of small businesses.
Tax Benefits and Liability Protection
Being an S Corporation (S Corp) implies that a business has chosen a special tax status with the IRS, allowing it to avoid double taxation. Unlike a traditional corporation (C Corp), an S Corp’s income, losses, deductions, and credits pass through to its shareholders’ personal tax returns. This means that the company itself does not pay federal income taxes; instead, its shareholders report the income or losses on their individual tax returns. Additionally, S Corps offer limited liability protection, shielding shareholders’ personal assets from business debts and liabilities. However, there are eligibility requirements and administrative responsibilities to maintain this status.
To deal with the variety of implications that a small business may face, laws allow businesses to be structured in a manner that allows for different tax obligations. In fact, one of the best tax advice for small business owners is to deeply consider how they want to structure their organization.
Based on shareholding, your organization can either be categorized as an ‘S Corporation’ or a ‘C Corporation’. Here’s a deeper dive into the former…
Read also: Democratising Finance: How Cryptocurrency Empowers Individuals In Australia
S Corporation Taxation and Benefits
For the Internal Revenue Service (IRS), an S Corporation is a company that passes their income, losses, deductions, and credits through to the shareholders for tax purposes. As such, instead of the business as a whole being taxed, the shareholders are taxed on their personal returns. S Corps are thus setup in stark contrast to the traditional double taxation implication of C Corps. Most entrepreneurs and small business owners favour being an S Corporation due to their status as a limited liability i.e. the individual’s personal assets and money is not jeopardized in the event that the company is sued or owes money.
These benefits are quite robust and are meant to encourage more and more people to begin an entrepreneurial journey. However, it is important to understand that not every small business structure may be recognized as an S Corporation. To be an S Corp, your business must:
- Operate Domestically
- Have Less Than 100 Shareholders
- Those Shareholders must be Individuals or very specific trusts and estates
Understanding the Importance of Taxes for Your Small Business
Taxes are quite a serious business. They are complex by design – incentivizing those who put thought and effort into understanding their liabilities. As you build your small business, it’s a wise idea to partner with the right tax advisors who understand your needs, and can provide necessary support to excel. Reach out to an expert advisor and begin your S Corp journey today!
