When starting a company, the most important decision that one should make is the kind of business one should register for. That does not mean that it is the only factor that one should consider while starting a business. According to the US Bureau of Labor Statistics, approximately 25 percent of new companies fail during the first two years of business, 46 percent during the first six years, and over 60 percent during the first ten years ( Labor, 2017) . These companies fail, not because they lacked the knowledge to apply the business idea but because of other external factors such as high competition in the market, lack of demand, high startup costs, among other conditions. According to Forbes (2021), even though all these circumstances might make a business fail, the kind of business an entrepreneur register is perhaps the most important factor. It has a long-term impact on the business since it affects the company's taxes, liabilities, and how it will be managed, thereby dictating its success. Therefore, before starting a business, entrepreneurs should look into the available types of companies to determine their advantages and shortcomings for the success of the business.
Tax Rules and Treatment Applicable to Corporations and Partnerships
Corporations and partnerships operate on different sets of tax rules, normally applicable during dissolution, settling debts, sharing profits, and even paying monthly and annual taxes. In a partnership structure, all general partners are liable to the organization's debt and all legal responsibilities. On the other hand, corporations are not held accountable for the organization's legal and financial obligations. The US government considers corporations as separate entities, and they are responsible for assuming all legal charges and debts accrues against them, and shareholders are not at risk of losing their assets ( Oats & Tuck, 3) . In this case, partners within a partnership-formed organization may be stripped off of their possessions to pay the company's debt, and they often include agreements of the percentage each partner is responsible for before it is incorporated. The different between C and S corporation is taxes whereby C corporations are taxed on income while S corporations do not pay tax instead the owners report the company’s revenue as personal income.
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According to the research conducted on small business in the US, a partnership form of business does not have to pay for business taxes since profits and losses are transferred to individual general partners (Guerra & Harrington, 1). On the other hand, corporations are separate legal entities, and shareholders enjoy the protection of this tax law from unlimited liability. Another treatment applicable to corporations is an organization's ability to file a case on an individual with the help of its human resource; however, this option is unavailable to partnerships. Corporations also enjoy unlimited options to generate capital for business, while partnerships are limited to a specific niche stated during business registration. This rule makes it possible for corporations to scale while limiting partnerships to specific target markets and activities. Therefore, since businesses operate on different sets of rules, a business owner might opt to go for a partnership form of organization and not corporations, or vice versa. Depending on the nature of the business, startup capital, among other factors, an organization should be aware of the tax rules and treatments applicable to different forms of business before making a decision.
Choice of Organization Type
Deciding on the form of an organization a business owner should start will impact several aspects of the company, including how profits and losses will be divided, the types of taxes it will pay, and how the business will be managed. If a business owner plans to form a large organization, it would be more effective to incorporate a corporation other than a partnership since it offers several advantages that they might leverage. Examining each business structure's benefits will help them decide the best path to smoothen the company's operations. Even though corporations are more complex and often involve lots of paperwork and expenses, their rewards are more lucrative compared to other forms of business, and entrepreneurs should consider choosing them from other forms, depending on their ambitions.
Corporations enjoy tax benefits that other forms of business, such as partnerships and a sole proprietorship, do not. According to the US Treasury corporations must file tax returns separately from shareholders since their liabilities are limited (Treasury, 7). Shareholders who are the organization owners must pay taxes on their bonuses, dividend, and salaries earned from the corporation. However, a business owner might choose to form a corporation because of the loopholes that exist to decrease the amount of tax an individual shareholder pays to the government and the organization. Since corporations are not obliged to pay taxes on their earnings remitted to their shareholders and employees, the organization can deduct the payments and record them as a business expense.
Additionally, corporate taxes are generally lower than personal income tax rates. In contrast, business partnerships and sole proprietorship firms have fewer tax benefits since they pay income tax on regular government rates on profits earned from their companies. Secondly, business owners might opt for corporations because of the extent to which they are insulated from legal liabilities. According to Forbes, the biggest advantage that corporations offer to business owners is the protection from liabilities (Forbes, 6). Shareholders of a corporation cannot lose their assets and valuables to its debts since the organization is treated as a separate legal entity from its owners and the shareholders. On the other hand, owners of sole proprietorship and partnership businesses are held responsible for all the company's debts and legal charges and are exposed to risks of losing personal assets in legal pursuits or if the organization is declared bankrupt.
Source of Tax Guidance and How It Defines an Organization’s Tax Policy
According to the IRS's source tax guidance, corporations are formed by prospective shareholders who exchange money for the organization's stock ( Oats & Tuck, 3) . The organization conducts a business, realizes net profit or loss, and distributes accordingly to its shareholders. The corporate tax guidance enables the organization to operate under the policy that their taxable profit equals their sales less allowable deductions. This deduction includes employees' wages and deductions, costs of goods sold, advertising, and depreciation, among other deductions. According to the US treasury, the policy is also applicable to foreign multinational companies operating in the United States, acting as the third-largest source of federal revenue (Treasury, 7). However, according to IRS, C or standard corporations differ from s corporations that are normally subjected to special tax status. Since C corporations are considered separate tax-paying entities, they are subjected to a double taxation policy. The profits from such corporations are taxed when they are earned and shareholders during the distribution of dividends. On the other hand, partnerships must file information on their returns directly paid to the IRS. In this case, their tax returns include computation of applicable deductions, partnership incomes, and tac dues based on profit and loss reported by their returns. Taxes paid by the company is distributed to partners based on their shares in the company.
Apple Inc. and Its Financial Tax Reports
Founded by Steve Jobs and being considered one of the most valuable companies globally , Apple is worth over 2 trillion dollars (Apple,8). Formed as a limited liability company, the organization has periodically grown and increased its profits to investors and shareholders. According to the company’s quarterly report released in October 2020, the company posted record revenue of over 64 billion dollars and an earning per diluted share of over 0.72 dollars (Apple, 8). The company's international sales accounted for over 55 percent of the period's revenue. Since Apple is a limited liability company and is governed by shareholders, the financial tax reports that the organization paid nearly 22 billion dollars during the last quarter of 2020. During the period, the company declared a cash dividend of 0.203 dollars per share of its common stock. In their financial tax report, Apple had recorded a net sale of over 64 billion dollars deducted first from other expenses such as research and development and cost of sales to evaluate their net income ( Janský & Palanský, 2) . Therefore, Steve Jobs registered Apple as a limited liability company to enjoy unlimited options to generate capital while paying less taxes, making it one of the most successful companies in the world.
Sources
Guerra, A., & Harrington, B. (2018). Attitude–behavior consistency in tax compliance: A cross-national comparison. Journal of Economic Behavior & Organization , 156 , 184-205.
Janský, P., & Palanský, M. (2019). Estimating the scale of profit shifting and tax revenue losses related to foreign direct investment. International Tax and Public Finance , 26 (5), 1048-1103.
Oats, L., & Tuck, P. (2019). Corporate tax avoidance: is tax transparency the solution?. Accounting and Business Research , 49 (5), 565-583.
Wong, A., Holmes, S., & Schaper, M. T. (2018). How do small business owners actually make their financial decisions? Understanding SME financial behaviour using a case-based approach. Small Enterprise Research , 25 (1), 36-51.
Labor, U. D. (2017). US Bureau of Labor Statistics. Retrieved from https://www.bls.gov/
Forbes. (2021). Retrieved 3 March 2021, from https://www.forbes.com/?sh=3e7858282254
U.S. Department of the Treasury. (2021). Retrieved 3 March 2021, from https://home.treasury.gov/
Apple. (2021). Retrieved 3 March 2021, from https://www.apple.com/
