A common question among small business owners is “How will my business’ taxes affect my personal tax’s, and vice versa?”. While owning a small business does not exempt you from paying personal tax, the type of business structure you choose will have an effect on your business taxes. Read on to learn about some of the most common business structures, and how they impact both your personal and business taxes.
Sole Proprietorship
Running your business as a sole proprietorship means that you are your business. Your company has no legal identity separate from yourself. In the eyes of the government, a sole proprietorship does not exist as a taxable entity. Instead, the CRA deals with you directly. In a sole proprietorship, all company profit is to be reported as personal income.
Pros
- You do not pay federal business income tax
Cons
- Because you’re reporting all income as personal, you’ll be paying twice the usual amount of self-employment taxes
- There are some liability risks that are associated with sole proprietorships
Incorporated Businesses
When you incorporate your business, you add on a layer of protection against liabilities and debts resulting from the operation of your business; however, it also adds on a layer of taxes. In an incorporated business, you have to pay taxes on any profits that your company makes. While this business structure is usually only considered by larger companies, if your business is a fast growing start-up, setting up your business as a corporation may be a good idea.
Pros
- Company has a separate identity from yourself as the owner.
- Liability and debt protection
Cons
- Have to pay business income tax
Limited Liability Company
A limited liability company (LLC) allows you to receive many of the benefits of being a corporation when it comes to protecting your personal assets, while still allowing you to claim all business profit as personal income. Similar to a sole proprietorship, you and your company are considered to be the same entity. LLC’s are one of the most common business structures for small businesses.
Pros
- Some financial and legal protections
- Do not have to pay business income tax
Cons
- Since you’ll be claiming all income as personal, you will be paying extra self-employment tax
Questions? Call Liu & Associates
If you are a small business owner with questions about business and personal tax, give the team at Liu & Associates a call! Our expert accountants can help make sure that you are setting yourself, and your business, up for success.