56 ©2018 WASHINGTON DC ECONOMIC PARTNERSHIP BUSINESS TAXES
EMPLOYER TAXES
When choosing your business ownership structure, pay close attention to the tax implications of the designation that you
choose. As your business grows, it is normal to change your entity structure to accommodate changes in ownership, revenue, and
investment or to minimize financial risk and tax liability. While it is best to assess your options with a tax advisor, review the
considerations below:
Business Ownership Structure Tax Considerations
Sole Proprietorship • Profits are personally taxed to owner
• Sole proprietors need to pay self-employment tax on their. profits
• Offers few tax benefits
General Partnership • Profits are personally taxed to partners based on percentage of ownership
• Can claim on personal taxes
Limited Liability Company (LLC) • Corporation is taxed on earnings; owners only taxed on income taken out of business
• While the federal government does not tax income on an LLC, some states do. Check
with your state’s income tax agency. For more information, visit bit.ly/statebiztaxes.
• Additional tax benefits
C Corporation • C Corporation owners must file personal and business tax returns separately
• Corporate earnings are subject to “double taxation” when corporations are taxed and
shareholders receive dividends
• May be beneficial if you plan on investing the profits of your business back into the
company
Limited Partnership • Profits are personally taxed to partners based on percentage of ownership
• Can claim on personal taxes
Limited Liability Partnership • Profits and losses can be passed to individual tax returns
• Special Tax Consequences
Nonprofit • May seek to be exempt from taxation, which requires the approval of the IRS under
specific guidelines
• Time consuming and costly process to apply for and maintain tax-exempt status
S Corporation • S Corporation does not pay income taxes on any profits
• Difficult to qualify for IRS requirements
• Shareholders of S corporations report the flow-through of income and losses on their
personal tax returns and are assessed tax at their individual income tax rates
Benefit Corporation • Taxed as a C or S Corporation, depending on your ownership structure
• Benefit corporations are for-profit entities and do not offer philanthropists the same tax
advantages as donating to a nonprofit organization
Cooperative Association • Exempt from taxation on all income that is distributed to worker-members