When you are faced with business tax planning issues, working closely with an attorney who will explain clearly all options and consequences can help to ensure that you make decisions that are in your business' best interests. Contact our firm today to schedule a consultation with an experienced tax attorney.
Tax Planning and Estate Planning Lawyers: Michigan and Nationwide
Attorney Jeffrey S. Freeman has practiced tax law since 1994. Today he leads a team of accomplished lawyers and a professional staff prepared to help you resolve current tax problems, guide you through innovative tax planning for your new or existing business, or help you develop a legally sound, comprehensive estate plan designed to provide maximum protection of your assets.
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Whether you are starting a business or organizing your personal affairs with an eye to tax consequences and other financial priorities, you can contact the Law Offices of Jeffrey S. Freeman for guidance based on extensive knowledge and experience. Based in Birmingham, Michigan, we frequently assist clients statewide, including the Detroit metro and throughout Wayne County, Oakland County, Macomb County and Washtenaw County.
At the Law Offices of Jeffrey S. Freeman, you will find lawyers with an in-depth understanding of finance and tax matters. We will prioritize your needs and protection of your interests as we deliver complete tax planning solutions for your family, new business or ongoing enterprise.
Business Organization and Taxation
When deciding which type of entity is right for your business, it is important to consider the tax implications. Each entity is subject to different taxation requirements. The most common types of domestic business entities are sole proprietorships, partnerships, corporations and limited liability companies. A tax attorney at Law Offices of Jeffrey S. Freeman in Birmingham, MI, can help you weigh the tax advantages and disadvantages of the different business forms.
Sole Proprietorship
A sole proprietorship is an unincorporated business owned by one person. This type of entity does not have any special state formation requirements and the owner does not have to file any paperwork with the government. A sole proprietorship does not limit the owner's liability in any way. The owner has complete control over the management of the business and retains all profits of the business. For tax purposes, all tax information, including income and losses of the business, is disclosed on the individual's tax filing. There is no additional business tax filing required. A sole proprietorship uses the calendar year for its tax year. If the sole proprietorship does business in more than one state, the business' income will be divided up among those states to determine how much tax the business must pay in each one.
Partnership
The Uniform Partnership Act defines a partnership as "an association of two or more persons to carry on as co-owners a business for profit." There are several types of partnerships including general partnerships, limited partnerships and limited liability partnerships. A partnership is not treated as a separate entity for tax purposes. Under subchapter K of the Internal Revenue Code, partnership income, gains, losses, deductions and credits pass through the partnership and are accounted for by individual partners on their individual tax returns. Partnerships generally use the same tax year as the majority of the partners. Partnerships that do business in more than one state will divide up the income among those states and pay a proportional amount of tax in each one. While the partnership is not taxed, it still must file an informational tax return. It must also provide partners with information they need to file their personal tax returns.
Corporations
There are two main types of corporations; the C corporation and the S corporation. The traditional or regular corporation is known as a C corporation, so named because it is subject to taxation under subchapter C of the Internal Revenue Code. The C corporation is subject to two levels of taxation. The corporation itself pays taxes on any gains, and then the stockholders personally pay taxes on the income that is passed on to them by the corporation. C corporations can carry net operating losses back 5 years and forward for 20 years.
The rate of taxation for the corporation depends on the amount of income the company realizes; the top federal rate is about 35 percent, while the top state tax rate is about 10 percent. If a corporation does business in more than one state, it will divide up its business income among those states and pay the appropriate amount of tax in each state. A C corporation can adopt any tax year, it does not need to use the calendar year as its tax year.
An S corporation is a regular corporation that qualifies and elects to be taxed under subchapter S of the Internal Revenue Code. Probably the most important difference between a C corporation and an S corporation is that a C corporation is subject to double taxation while an S corporation is not. Income of an S corporation is not taxed at the corporate level. Shareholders account for all income, gains, losses, deductions and credits on their individual tax returns. The tax year for an S corporation is the calendar year.
In order to be classified as an S corporation, all shareholders must elect to have the business taxed as an S corporation. In addition, the corporation must meet the definition of a "small business corporation." A corporation is a small business corporation if it has fewer than 75 shareholders. These shareholders must be individuals, estates or certain qualifying trusts. Shareholders must also be U.S. citizens and residents.
Limited Liability Company
A limited liability company (LLC) is a relatively new business form. Each state has laws that allow for the formation of an LLC. LLCs are separate legal entities like corporations, but are treated as partnerships for tax purposes so they avoid the double taxation faced by corporations. Thus, there is no corporate tax on the earnings of the LLC, and each individual owner is personally responsible for the LLC's taxes and must report any gains or losses on their individual tax returns. Even though LLCs do not pay federal income taxes, some states do tax LLCs.
Talk to a Tax Lawyer
With all of these options available to your business, it is crucial to examine the tax implications of each form and select an entity that fits your business objectives. A tax attorney at Law Offices of Jeffrey S. Freeman in Birmingham, MI can help you choose the one that is best for your business.
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