Partnership Chair
If you are looking to start your own business, it’s important to consider your tax obligations. With nearly a dozen different entity options to choose from in North Carolina, you will have to factor in taxes when determining how much startup money you will need. From a numbers standpoint, tax implications may mean the difference in whether or not your business is ultimately successful. While it’s always best to consult a North Carolina business attorney, here is an overview of your options.
Understanding Different Types of Business Structures and Their Tax Implications
There are only a few business entity options in which tax implications are simple, according to the North Carolina Secretary of State. If you are starting a nonprofit, there are no tax liabilities as long as you follow the legal formalities and tax filing protocols. If you are a sole proprietorship, limited partnership, or general partnership, each individual partner is taxed personally. The advantage to incorporating is that the business gets taxed, not the individual.
The Influence of Taxation on Corporations and S Corporations
Taxation affects corporations, S corporations, and limited liability companies (LLCs) differently, influencing their structure and financial planning. Traditional C corporations face corporate tax rates, leading to potential double taxation when profits are distributed to shareholders as dividends. This dual taxation can deter smaller businesses from adopting the C corporation structure.
Here’s how taxation impacts these business entities:
- Corporate Tax Rates: C corporations are subject to corporate tax rates and may face double taxation when distributing profits to shareholders.
- Pass-Through Taxation: S corporations and LLCs enjoy pass-through taxation, where profits and losses are reported on individual tax returns, avoiding corporate-level taxes.
- Ownership Restrictions: S corporations are limited to 100 shareholders, all of whom must be U.S. citizens or residents, while C corporations and LLCs do not have such restrictions.
- Compliance Requirements: S corporations must adhere to specific IRS rules to maintain their pass-through status, while C corporations have more complex compliance needs due to corporate-level taxation. LLCs generally have more flexibility in governance and fewer compliance requirements compared to corporations.
Understanding the influence of taxation on these business entities is crucial for business owners. S corporations and LLCs offer benefits like pass-through taxation and liability protection, while C corporations provide more flexibility for larger businesses and institutional investors. Choosing the right structure depends on factors like ownership needs, tax planning, and future growth strategies.
Important Tax Factors to Consider with Limited Liability Companies
Many business owners choose to form LLCs because of the tax benefits. The LLC must be registered with the Secretary of State and file Articles of Incorporation and annual reports. However, businesses can choose to be taxed as a “C” Corp or as an “S” Corp.
Attorneys, accountants, and doctors, being licensed, can form a PLLC (Professional Limited Liability Company) and enjoy the same benefits.
Tax Deductions and Credits Available to New NC Businesses
North Carolina offers a variety of tax incentives for those who start a new business in their state:
- The Work Opportunity Tax Credit is a payroll tax incentive offered to businesses who hire someone who would otherwise have a hard time finding work, such as a disabled veteran, ex-felon, or someone receiving TANF (Temporary Assistance to Needy Families) payments
- The Disabled Access Tax Credit is extended to businesses that make their place of business more friendly to disabled employees or customers
- Architectural and Transportation Removal Deduction offers up to $15K yearly to businesses that remove architectural or transportation barriers causing issues for elderly or disabled individuals
These incentives benefit a business not just monetarily but by building up goodwill towards the business.
How a North Carolina Business Attorney Can Assist in Understanding and Managing Business Formation Tax Implications
The process of navigating federal and state taxes while forming your new business can be complex and confusing. An experienced attorney can make it doable. We want to see your business succeed. Contact us today for a free consultation and let us have the privilege of helping you.
