Ruvalcaba Franco Generally, nonprofit organizations are registered as 501(c)3 organizations, which means that they can provide their services as a public good without having to return a portion of their income to the government. Similarly, individuals and businesses that donate to these organizations can write off their contributions as tax-exempt. Commercial companies cannot take advantage of tax exemptions and must pay taxes as required by law.
Taxes must be paid on the money earned, while deductions can be made for business losses. Either the business or the independent owners cover the tax liability and take all applicable tax deductions for the losses. In some cases, the business and its owners are taxed on the same income, which is called double taxation and which most business owners try to avoid. Because there are different tax rules for different types of business organizations, the method of taxation needs to be considered when you first start running your organization. Tax structures for common types of businesses include the following:
Partnerships and sole proprietorships. Business owners are taxed on income and make deductions for losses on their personal tax returns. Partnerships do not pay separate taxes on income earned. Individual entrepreneurs are sole proprietorships that are considered one and the same as their business.
Partnerships are joint ventures with more than one owner, and taxes and profits are split among the owners. Each owner is taxed based on their share of the profits and can receive a credit for their share of the losses. Self-employment taxes (Social Security and Medicaid) must be paid by sole proprietors and partners.
Limited Liability Partnerships. Limited liability partnerships differ from general partnerships because limited partners do not play an active role in the business and their potential losses are limited to their investments. The tax rules for general partners in limited partnerships are the same as the tax rules for standard partnerships. However, a limited partner is taxed differently. A limited partner does not have to pay self-employment taxes on income derived from the partnership because, by definition, he or she is not engaged in business.
Limited Liability Company. A limited liability company can be taxed either as a partnership or as a corporation. If a limited liability company is taxed as a partnership, it allows income and losses to be passed on to the owners. Profits and losses are divided among the various owners, who then claim the income or deduct the losses on their personal tax returns.
Corporation. There are two different types of corporations. C-corporations pay taxes on income and the owners are then taxed again when distributions are made or dividends are paid. S-Corporations, on the other hand, let pass through taxation. S-Corporations do not pay taxes at the corporate level, and profits and losses are declared on individual owners’ tax returns.
It is important to understand the taxes for different types of business organizations and make the right choices when starting your business.
