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Business formation and how that choice impacts taxes

Starting a California business is an exciting time, but there are important financial and legal issues to consider before moving forward. The choices an entrepreneur makes in the initial stages of his or her company will have significant impact on various factors down the road, including taxes. During the business formation stage, it is prudent to think about how the choice of entity will determine taxes as well.

The legal structure of a business determines how a business owner will be taxed and his or her personal financial liability for business-related taxes. As an example, a sole proprietorship is a common choice for a structure of a small business, and all business losses and income are on the owner's personal tax returns. In partnerships, the partners will share responsibility for debts, and income or losses are on all parties' personal tax returns.

A corporation is a separate entity from its owner and founder. This means that person is not liable for business taxes on a personal level. An LLC is a combination of a few business entities, but the owners may be personally liable for business taxes.

It is not always to know the right choice when starting a business, which is why it is prudent to seek experienced guidance in the initial business formation stages of a California business. Seeking help can help an entrepreneur avoid problems and mistakes that could prove costly down the road. Before choosing which type of entity a business should be, it may be helpful to first seek an explanation of different business types and how the taxes will work.

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