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Which business structure and state will result in the lowest taxes

 
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Category : > New Business Setup
Posted On : Sun Oct 22nd,2017

 
Best state and the business structure to pay lowest taxes in the USA? We are sharing this information based on the daily inquiries receive from InfoTaxsquare.com users.
 

There is no universal answer to this question, however, some corporate structures can allow you to save more taxes than others. It is a very sensitive decision to register company other than your home state and it must be consulted with your certified public accountant to an attorney for the right guidance before making a final decision on what structure and the state best suits your business needs.

You may consider following options to make up your mind to start a company:

Advantages and Disadvantages of C Corporation | S Corporation | LLC | Limited Partnerships | Fictitious Name | Non Profit Corporations

C Corporation or General Profit Corporation

Advantages of Profit Corporation:

  • C Corporation is independent from owners or stockholders.
  • Fringe benefits cost are tax deductible in general profit corporations.
  • Owners or stockholders of corporation's personal assets separate from business and protected from business liability.
  • General profit corporation's ownership can be easily transferred through the sale of stock and you can raise capital through selling stocks.
  • Deferred taxes on income and tax rate can be lower.
  • You cannot choose the state to register your profit corporation according to your wish. Generally, it is incorporated where you physically conduct business. A Non USA resident is eligible to register a general profit corporation.

Disadvantages of Profit Corporation:

It is subject to a double taxation. First pay on the corporate level, then pays on dividends.

Advantages and Disadvantages of an S Corporation:

  • It is not subject to double taxation and must have a social security number of qualities to file taxes as an S Corporation.
  • Due taxes must be paid off in the year income was earned and cannot be deferred as a C Corporation.
  • You cannot choose the state to register your profit S corporation according to your wish. Generally, it is incorporated where you physically conduct business. A non US resident cannot register an S profit corporation.

Advantages and Disadvantages of Non Profit Corporations:

  • It is different from regular general profit corporations. A non profit corporations can be incorporated in a few states as a Limited Liability Company but not an S Corporation.
  • There are two types of non profit corporations, religious and non religious. In some states religious corporations are filed with the county clerks office instead of the secretary of state.
  • Religious corporations are exempted, file returns with the Internal Revenue Service every year like profit corporations.
  • Non profit entities have business operational flexibility and do not pay taxes on contributions other than related income on selling products and services.
  • Non profit entities have merger limitations comparing to profit entities.
  • Non profit corporations must have tax exemption from the Internal Revenue Service Center in order to issue a letter to their donors to claim deductions on their income tax returns.
  • Audit chances are very high from the taxing authorities to make sure the contributions are properly spent, so, keep proper records of contributions and distribution to present to the taxing authorities if your nonprofit organization come under the audit.
  • Non profit organizations have no owners, gives no income except salaries and operating expenses to members, directors or officers and must have a Board of Directors.

 

Limited Partnerships Such As LP, LLP, LLP and LLLP:

  • Limited Partnerships can be formed by one person only.
  • Limited Partnerships are easy to establish and partners’ assets are not at risk from creditors.
  • Partners share profits and losses according to their ownership in the Limited Partnership.
  • Limited partnerships can be little more expensive to setup than other corporate structures due to creating an operating agreement and generally you consult lawyers to prepare an operating agreement according to the partners understanding to avoid future complications.
  • In some states a sole owner cannot set up an LLP as a partnership, an LLP must have at least two partners to exist and it can be automatically dissolved if one partner quits. You must check the state laws before making up your mind to structure your entity under limited partnerships.
  • Limited Partnerships are pass-through entities and avoid double taxation. Due taxes must be paid the year income was earned and cannot be deferred as general profit corporations.

The advantages and Disadvantages of creating Limited Liability Companies

  • LLC can be formed with one member only.
  • Taxes cannot be deferred and due taxes pay in the year it earns.
  • Corporate structure Limited Liability Company has a flexibility to use as a general corporation, s corporation or a partnership.
  • Personal assets are protected from business liability in the LLC.
  • Limited Liability Companies have no limitation on the number or nature of owners or members.
  • It is simpler than corporations to manage and owners can be added and removed easily.
  • An operating agreement must be written to manage business under an LLC and you may need legal assistance to set it up.
  • In some states Professionals, such as lawyers, architects, accountants, engineers and doctors, etc.. —shall register Professional LLC (PLLC).
  • A non US resident can register an LLC in the USA.

 

Sole Proprietorship | General Partnership

  • One person is required to register a sole proprietorship while two people in the general partnership.
  • Minimal legal restrictions or requirements to manage and establish Sole Proprietorship and General Partnership.
  • Not requirement to pay unemployment taxes
  • Personally liable for all business transactions and personal assets are not protected as corporations, Limited Companies and Limited Partnerships.
  • Both are pass-through entities and pay due taxes in the year earns.
  


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