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Characteristics and Income Taxation of Business Entities - Taxation at Entity and Owner Level

Taxation at Entity and Owner Level


Formation
The entity type and geographical location of where an organization or business is established will greatly influence the tax treatment of income at the federal, state, and local levels.

Charitable organizations are granted tax-exempt status under Section 501(c)(3). Individuals can setup sole proprietorships, partnerships and LLCs to control liability and enhance the benefits of deduction/loss possibilities, but still maintain the benefits of full control.

If you decide to incorporate a business, LLCs, S-corporations and C-corporations will provide a higher degree of limited liability and more variables to raise capital for future growth of the organization.

Flow through of Income and Losses

Depending on the type of entity, the income generated may be taxed at the corporate level or flow-through to the owner/shareholder. With the exception of limited liability companies, the tax law is pretty clear. LLCs can be setup as sole proprietorships, partnerships, s-corps and c-corps, so their taxation will follow the selection of the entity. The chart below will outline the tax treatment of income and who receives the loss deductions.
Organization
Entity Income
Owner Income
Entity Losses
Owner Losses
Sole Proprietor
No tax
Owner taxed
No Loss
Owner deducted
Partnership
No tax
Partners taxed
No Loss
Partner deduction
LLC
Varies
Varies
Varies
Varies
S-Corporation
No tax
Shareholder taxed
No Loss
Shareholder loss
C-Corporation
Entity taxed
Shareholder taxed
Entity takes loss
Shareholder loss

Special Taxes
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