Hi, I am Robert Naini, your Spray Foam Advisor, and “The Guy in the Hawaiian Shirt”.
I wear the Hawaiian Shirt as a symbol of freedom and flexibility, something that all business owners should want.
And one of my goals is to help 100 Spray Foam business owners set up their business in a way that gets them freedom and flexibility.
This includes providing spray foam training, education, tips & tricks, business fundamentals and coaching or consulting services.
Last week I talked about the legal implications and the responsibilities of the different entity types.
If you haven’t seen the last couple of videos in this series, I talk about the five most common types of business entities and the liability implications of these different entity types, you can find the videos at these links:
Business Entities and What it Means for You
Business Entities and Your Legal Liability
In this video, I want to focus on the tax implications of each of these types of business entities. First and foremost, the sole proprietorship and general partnership are going to be treated very similar to each other, and from a tax standpoint these entities are called pass-through entities, as the income and expenses will “pass through the company” and be applied directly to the business owner’s personal tax return.
If you operate a sole proprietorship or if you run a general partnership profits or losses will go directly on Form 1040.
For a sole proprietor, your income, expenses, profits or losses are reported on Schedule C, as an addendum to your standard Form 1040, and the profit or loss is transferred to Form 1040.
General partnerships and limited liability partnerships will report income and expenses on Schedule K-1, and the profit or loss is applied to Schedule E and then transferred to Form 1040.
All of this shows how the sole proprietor and the general partnership act as pass-through entities, where the profits or losses end up directly on your personal tax forms, which means your profits will be taxed at your personal tax rates and you will have to pay self-employment taxes on all your earnings from the business as well. Any draws, salary or dividend distributions are all treated as personal income and go directly to your personal tax forms.
This is different for S Corps and C Corps.
S Corps and C Corps have different tax implications, for example, as an owner-operator, an owner that runs the business and an operator that works in the business as an employee you have two income components from these businesses – salary and dividends or distributions of company profits.
First, you have an income from your salary or payment for working as an employee of the business; the company should pay you for the day-to-day and week-to-week functions that you provide for the business just like the business would pay someone else to execute those functions.
With both the S Corp and C Corp, this salary is deductible to the business, and the owner would get a W-2 to report the income on their personal taxes just like any other employee would.
And then dividends or profit distributions are taxed separately.
In the case of S corporations, there is not a company tax, but the salary that you collect and the dividend that’s paid out to you will be taxed on your personal tax forms.
Now, if you’ve ever heard of the risk of double taxation this comes into play with C corporations – where the C Corp files a tax return, and their profits are taxed at corporate rates, and then any dividends paid to the owners from those profits are taxed again on the owner’s personal tax returns, hence the phrase double taxation.
Now I don’t have any experience running a C corporation, but most of us have owned shares of stock in companies that are structured as C Corporations and when we get dividends paid from those shares, that is taxed on our personal tax forms as a dividend.
This has been a general overview of the tax implications of various business entities, but you may have noticed that I haven’t mentioned LLCs yet.
And that is because an LLC or a Limited Liability Company is a disregarded entity for tax purposes.
So, from a tax standpoint, the IRS does not recognize the LLC as a taxable entity, which means if you operate an LLC, the standard taxation election from the IRS is that the business will be treated as a pass-through entity, and the profits or losses will roll up to your personal tax return.
The LLC does not file a tax return or pay taxes because it is not a taxable entity in the eyes of the IRS.
In the case of a single member LLC, it would be treated as a sole proprietor.
And in the case of a multi member LLC, it would be treated as a general partnership.
Now, you can take a tax election for the LLC to be taxed as either an S Corp or a C Corp and if you make this tax election, then all the tax implications that we discussed for the S Corp or C Corp would apply to that LLC.
If you elect to be taxed as an S Corp, then all the tax implications that apply to an S Corp would apply to your LLC.
If you elect to be taxed as a C Corp, then all the tax implications that apply to a C Corp would apply to your LLC.
I highly recommend you get some professional help, talk to your accountant, talk to your CPA, talk to your lawyer and in general it’s a good idea to have advisors at all levels of your business, including the legal and accounting aspects of your business. And make sure they’re talking to each other, so the left hand knows what the right hand is doing; this is good advice for any type of entity and any type of business that you’re running.
You want to make sure that the advisors helping you at the highest levels are communicating with each other and that their plans work together to benefit your organization in every way possible – including both legal liability and taxation.
If you found this video helpful then it would probably be valuable to your friends in the spray foam industry, so help us all out and send it to three or four people that you know.
Additionally, if you have any questions, want info on a specific topic, or want to learn how Spray Foam Advisor might be able to help you or your business, you can email us at [email protected]. This is Robert Naini, your Spray Foam Advisor, and “The Guy in the Hawaiian Shirt”, thanks for checking this out and catch me on some more videos.
