Passive Income Businesses and Legal Organization

July 4th, 2007 | stacey | Passive Income

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When you start a passive income business organization, a natural question to ask is what form of legal organization is best to use. Legal and tax issues come into play for business owners depending on whether they earn active or passive income.

Most people are familiar with active income because it is the salary you earn from a business from doing tasks related to your job. When you earn active income, it is subject to Social Security taxes, Medicare or employment taxes and this can add up to around fifteen percent of what you earn. Earning passive income is in essence considered to be a royalty, dividend or rental type of earning from business that is not task-oriented and thus not subject to regular employment taxes.

The structure of your business organization, however, determines how taxes will be handled with regard to earning active income versus earning passive income. When you attain passive income, you need to carefully consider whether you want to organize your business as an LLC, an C corporation or an S corporation. Each have their own unique tax considerations and carry various ramifications with regard to earnings and paying taxes.

Before you decide how to organize your business, determine the level of active income and passive income you earn annually. Discuss the relevancy of your business organization and paying taxes with both your accountant and your attorney to choose the most advantageous corporate structure for your business.