Decisions made when starting a business can greatly affect tax liabilities in the future. The following ten tips can help reduce taxes for startup companies. Selection of tax entity. An entity is a form of business. The IRS has devised various mechanisms to tax each of these entities and the owners thereof.
Distributions are typically nontaxable.
This single level of taxation is very attractive for startup companies. In addition, LLC and partnership entities allow flexibility in the tax treatment for each owner. For instance, the big money investor in the entity may want to deduct tax losses generated by the entity. The LLC has been very popular because it offers limited liability for all owners, single taxation for its owners, and flexibility for tax benefits, whereas the partnership entities cannot offer limited liability for all of its owners, and the S corporation can only allocate income and losses based on share ownership. However, keep in mind that for publicly traded companies, the only entity of choice is the C corporation because an S corporation limits the number of shareholders to 75.