Business Entities

The Influence of Your Business's Legal Structure on Accounting and Tax Filing

8/23/2023

The business entity you choose can have an impact on your company's accounting operations and taxes. Beyond determining operational protocols, funding avenues, and liability protections, your business's legal structure affects your day-to-day finances more than you might realize. In this comprehensive article, we will explore how various entity structures impact accounting practices, explore the implications on tax filing, and highlight the role of accounting software in efficiently managing your business no matter what entity you choose.

Business Entities and Taxes

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The legal structure you select for your business plays a fundamental role in shaping how you report and pay taxes. Learn more below:

Sole Proprietorship and General Partnership

Sole proprietors report business income and expenses on their personal tax returns (IRS Form 1040) through a Schedule C attachment.

Members of a general partnership file an information return (IRS Form 1065) that outlines profits, losses, and partners' shares. Note that the partnership itself does not pay income taxes. Instead, profits and losses "pass-through" to individual partners, who then report their respective shares on their personal returns.

Limited Liability Company (LLC)

LLCs offer flexibility in terms of taxation. A single-member LLC is often treated as a sole proprietorship for tax purposes, while multi-member LLCs can opt to be taxed as partnerships or even elect corporate taxation by filing IRS Form 8832.

Corporation

Corporations are distinct legal entities, and their profits and losses are separate from their owners' personal income. Regular or C Corporations pay taxes on their net income, and shareholders are also taxed on dividends received.

S Corporations, on the other hand, avoid double taxation by passing income, deductions, and credits to shareholders, who report the funds on their personal returns.

Business Entities and Accounting

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If you're a first-time business owner, you might think all companies handle their accounting operations similarly. In reality, there are several different types of accounting, some of which are related to the legal business structure you select:

Sole Proprietorship and General Partnership

Sole proprietorships and general partnerships often have simpler accounting needs than LLCs and corporations. Typically income and expenses are tracked, and businesses maintain records of transactions for accurate tax reporting.

Since sole proprietors and partnerships have personal liability for business debts, there's no distinction between personal and business assets for tax purposes. This does not, however, mean that you shouldn't maintain a separate business bank account.

Limited Liability Company (LLC)

LLCs offer a blend of liability protection and flexibility. They can maintain less formal accounting procedures in many cases, yet multi-member LLCs often require structured record-keeping to allocate profits and losses accurately.

If you need assistance to learn the differences between the cash accounting and accrual accounting methods, talk to a qualified financial professional. It is important to note that there is an accrual accounting threshold enforced by the IRS – for 2022, any business that earned has more than $27 million of average gross receipts is legally required to use the accrual technique.

Corporation

Corporations are required to engage rigorous accounting operations due to their distinct legal entity status. They must adhere to Generally Accepted Accounting Principles (GAAP) and prepare financial statements that offer transparency to shareholders, regulators, and investors.

It is rare for a corporation to file taxes without assistance from an expert. Most companies that choose this entity structure either have an in-house finance department or outsource financial tasks to a highly-qualified tax and accounting firm.

How Accounting Software Can Streamline Accounting

Business accounting software is a powerful tool for business owners, regardless of the legal structure they choose. Today's software suites offer a range of features, from real-time reporting to integrations with CRMs and other programs. The right software will simplify financial statement preparation, profit and loss reporting, and tax form filing. While all businesses can benefit from using accounting software, it is particularly useful for corporations and multi-member LLCs with complex tax considerations.

All companies can customize their software to suit their needs, as much as their chosen platform allows. For instance, multi-member LLCs can optimize features that accurately allocate profits and losses among members. Digital solutions like this reduce manual data entry, mitigating errors and freeing up valuable time. As your business evolves, accounting software grows alongside you, accommodating shifting legal structures, additional stakeholders, and rising sales volumes.

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The legal structure you choose for your business is more than just a formality; it's a decision that has profound implications on your accounting and tax obligations. Understanding the accounting requirements that are necessary for each business entity type can help you create a business plan that will work for you for years to come.

Find a tax and accounting firm to partner with your company for the long haul today.

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Lee Reams II

CEO

I am a tax and business news junkie who has spent the last 20 years developing and executing "best in class" word-of-mouth marketing campaigns for tax and accounting professionals. With TaxBuzz and CountingWorks we have taken that same commitment to quality content directly to the consumer. Keeping you up-to-date with the latest tax law changes, business growth tips and planning strategies to help you reach your best financial outcome.

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- Professional Judgment: TaxBuzz AI is a tool to aid tax professionals in research and analysis. It is not a replacement for professional judgment, and users should exercise their expertise when interpreting and applying the information generated.
- Consultation with Experts: While TaxBuzz AI provides valuable insights, it is crucial to consult with legal and tax experts to ensure the advice aligns with the latest legal developments and specific nuances of a particular situation.
- Verification of Information: Users are responsible for independently verifying the information provided by TaxBuzz AI, especially in instances where the advice generated is critical to decision-making.
- Educational Purposes: TaxBuzz AI is intended for educational and informational purposes only. It is not intended to provide specific legal or tax advice tailored to individual circumstances.
- Non-Endorsement: The use of TaxBuzz AI does not constitute an endorsement or guarantee of the accuracy of the information provided. Users are encouraged to corroborate the advice with other reliable sources.
By accessing and using TaxBuzz AI, you agree to abide by these terms and acknowledge the limitations outlined herein. We reserve the right to modify these terms at any time, and your continued use of TaxBuzz AI constitutes acceptance of any such modifications. If you do not agree with these terms, please refrain from using TaxBuzz AI.

TaxBuzz.com is a service of CountingWorks, Inc., 2549 Eastbuff Drive., #448 208, Newport Beach, CA 92660

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