Tax classification for business

Tax classification for business

In the United States of America, all companies or corporations are subject to taxation. The way they are classified depends on what was assigned during the document preparation. This classification is directly related to the IRS (Internal Revenue Service) and the State will have to adopt the same classification when it comes to taxation.

Limited Liability Companies can be classified in 4 ways: Disregarded Entity, Partnership, C Corporation and S Corporation.

Corporations are classified in two ways:

C Corporation and S Corporation.

These classifications can vary in many ways including:

  • Those who can own a company or corporation
  • How taxes are reported and distributed between owners and shareholders
  • How and how much taxes are paid
  • How profit and loss are recognized

If you are one of those who ask himself/herself, what is the best classification? We are sorry to say that there is not one better than another since each one has pros and cons. For instance, an S Corporation is normally preferred because it helps to save on self-employment tax. This is because S Corporations usually pay a “reasonable salary” to the owners. However, if you fail to comply with the IRS regulations, you will lose all the benefits, which means that your tax payment basis will be recalculated and this will result in taxes, penalties and interest payment.

If you are interested in knowing the best classification, we strictly recommend that you consult with a private accountant or a Certified Public Accountant (CPA).