05 Sep 2009

US Business Structures

by Darren

Under US tax law business income is income received for products or services sold. For example:

  • Fees paid to a professional person are considered business income.
  • Rents paid to a person in the real estate business are business income.
  • Payments received in the form of property or services must be included in income at their fair market value.

A business is generally structured as either a sole proprietorship, partnership, or corporation.

A sole proprietorship is the simplest form of business organization. It has no existence apart from its owner. Business debts are personal debts of the owner.

A partnership is an unincorporated organization that is created by two or more persons agreeing to carry on a trade or business. Each person contributes a combination of money, property, labor, or skills, and each expects to share in the profits and losses. A limited liability company with more than one owner is generally treated as a partnership for tax purposes.

A corporation, generally includes a business formed under Federal or state laws that refer to it as a corporation, body corporate, or body politic. It also includes certain businesses that elect to be taxed as a corporation. The owners of a corporation are the shareholders.

Corporations that meet the following requirements may elect to become S corporations. Such corporations are treated in a manner similar to partnerships such that the profits are distributed to the shareholders and declared on their annual tax return as an individual thus the S Corporation in itself is not subject to taxation.

Requirements for an entity to be treated as an S corporation

  • Must be an eligible entity that is a domestic corporation, or a limited liability company
  • Must have only one class of stock. For example Ordinary share only (Cannot have both ordinary and say preferential)
  • Must not have more than 100 shareholders. Note: Spouses are automatically treated as a single shareholder.
  • Shareholders must be U.S. citizens or residents, corporate shareholders and partnerships are to be excluded.
  • Profits and losses must be allocated to shareholders proportionately to each one's interest in the business.

So why would a person set up an S corporation as opposed to a C Corporation?
Where the individual tax rate is lower than the C Corporation tax rate then its a far better option.

The current C Corporation tax rates are as follows:

Taxable Income ($) Tax Rate
0 to 50,000 15%
50,000 to 75,000 25%
75,000 to 100,000 34%
100,000 to 335,000 39%
335,000 to 10,000,000 34%
10,000,000 to 15,000,000 35%
15,000,000 to 18,333,333 38%
18,333,333 and up 35%

The current Individual Tax rates are as follows:

Taxable Income ($) Tax Rate
0 to 8,025 10% of the amount over $0
8,025 to 32,550 $802.50 + 15% of the amount over $8,025
32,550 to 78,850 $4481.25 + 25% of the amount over $32,550
78,850 to 164,550 $16,056.25 + 28% of the amount over $78,850
164,550 to 357,700 40,052.25 +33% of the amount over $164,550
357,700 and up 103,791.75 + 35% of the amount over $357,700


Next entry: Japan Taxable Income
Previous entry: Singapore Assessable Income

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