Starting a new business involves making so many decisions. One of the first is what kind of business owner structure it will be? This decision determines which form your taxes are filed and impacts whether or not you need health insurance for yourself and your employees.
The six small business owner structures are:
1. Sole Proprietorship:
There are six small business owner structures to choose from, but a sole proprietorship is the simplest and most common. If you’re considering starting your own small business in this form of ownership, make sure that you understand all possible consequences before making any final decisions.
If you’re looking to start a business with friends or co-workers, it can be helpful to know what kind of business owner structure your partnership should form. This post covers the basics of partnerships and how they work in relation to taxes and responsibilities for each partner. Are you thinking about starting a new venture?
There are three different types of partnerships:
- General Partnerships: When each partner has equal liability.
- Limited partnership Restricts one partner’s responsibility to just their share in the business.
- Joint Ventures: Created for a single project or purpose.
The time and effort it takes to establish a corporation are worth the investment for established, large companies with multiple employees. Corporations are more complex than other business owner structures because they tend to have more administrative fees and complex tax and legal requirements. For example, they pay executive-level salaries and benefits or covering regular inspections.
One of the most frustrating aspects of a corporation is that it will be taxed twice: once when earnings are earned and again for any dividends distributed. The first issue with this system, which leads to double taxation, is that corporations don’t get deductions like individuals do if they distribute money back to shareholders in the form of dividends or stock buybacks. Shareholders can only deduct losses from their personal income tax return but not from corporate taxes!
S-corporations avoid double taxation on profits, but the shareholders are still taxed.
S-Corporations are the perfect way to limit your personal liability. You see, when you own an S-Corp (also known as a Subchapter S Corporation), it is treated as its own separate person for tax purposes and can pass:
- Corporate income
- Or Credits
through to their shareholders. These shareholders then get assessed at their individual income tax rates instead of being double-taxed on any profits made by the corporation – just what we want!. And even better: just like C-corporation shareholders does not have all responsibility put squarely on them should anything happen with company money or debt obligations. If someone messes up in business dealings while working under an S-Corp umbrella – they’re only liable for themselves personally– not from other assets such as their personal savings, home or other assets.
You must meet the following requirements to qualify for S-corporation status:
- Be a domestic corporation (where you only conduct business in your home country)
- Have only allowable shareholders, including individuals, certain trusts, and estates
- Be an eligible corporation
- Have no more than 100 shareholders
- Have only one class of stock
B-corporations are a less popular type of business owner structure. They’re also known as “B-corps,” and they operate in the same way as C- corporations, but with different purposes, accountability, and transparency. Shareholders expect B corps to produce some kind of public benefit in addition to financial profit, depending on where you live. For example, if your state requires an annual benefits report showing that the company’s contribution to good is required.
6. Limited Liability Company (LLC):
The LLC is a hybrid type of legal business owner structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of partners. The “owners” are called members, but depending on your state, they can consist of one individual (one owner), two or more individuals, corporations, or other LLCs.
PC: How to Start an LLC – What is an LLC
- Using HSAs with Social Security and Medicare
- Medical Premiums – Pre-Tax Vs. After-Tax
- IRC Section 105 Medical Reimbursement Plans
- S-corporation Owners Health Insurance Deduction
How Does Business Owner Structure Impact Health Benefits?
A Section 105 medical reimbursement plan, such as an HRA, is often used by small business owners to provide a tax-advantaged health benefit to their employees. The availability of the Section 105 tax benefits varies depending on the type of business and its business owner structure.
Some small business owners are eligible to participate in an employer-sponsored health care reimbursement plan. In contrast, others can only offer one to their employees.