Understanding Legal Entities and Owner Compensation for Virtual Bookkeepers

In the world of virtual bookkeeping, knowledge is power. As a professional in this field, understanding the intricacies of legal entities and owner compensation is not only crucial for your own confidence but also for the success of your clients. In this video, I will guide you through the essential aspects that every virtual bookkeeper should know about legal entities and how owners should be compensated.

What is a virtual bookkeeper


Before delving into the specifics, let's address why these details matter. In the United States, and likely in other parts of the world, comprehending how a company is structured for tax purposes is paramount. It significantly influences how you organize the books and, equally important, how the owner is compensated. Different legal entities entail varied methods of owner compensation, and being well-versed in these distinctions empowers you as a virtual bookkeeper.

Types of Legal Entities and Compensation Structures

1. Sole Proprietorship:
   - Tax Form: Schedule C
   - Owner Taxation: Individual's Form 1040
   - Compensation: Owner is taxed on the company's earnings, with the option for distributions but no payroll.

2. Limited Liability Company (LLC):
   - Tax Status: Often considered a disregarded entity for IRS purposes.
   - Compensation: Typically follows sole proprietorship taxation if no other election is made.

3. S Corporation:
   - Tax Form: 1120S
   - Owner Taxation: Company's earnings pass through to shareholders.
   - Compensation: Shareholders may take distributions, and reasonable compensation is recommended for active involvement.

4. General Partnership:
   - Tax Form: 1065
   - Owner Taxation: Company's earnings pass through to partners.
   - Compensation: Partners receive guaranteed payments, and no payroll is issued.

5. C Corporation:
   - Tax Form: 1120
   - Compensation: Stockholders receive dividends, and employees (who are stockholders) are paid salaries.

6. LLC Taxed as S Corporation:
   - Tax Form: 1120S
   - Compensation: Treated similarly to an S Corporation regarding taxation and compensation.

7. LLC Taxed as Partnership:
   - Tax Form: 1065
   - Compensation: Treated as a general partnership for taxation and compensation.

8. LLC Taxed as C Corporation:
   - Tax Form: 1120
   - Compensation: Treated similarly to a C Corporation regarding taxation and compensation.

Empower Yourself and Your Clients


Armed with this knowledge, you can now approach your clients with a crucial question: "How is your company set up for legal and tax purposes?" Their response will guide you in tailoring your bookkeeping services effectively.

I hope this breakdown enhances your understanding of legal entities and owner compensation in the virtual bookkeeping realm. If you found this content helpful, consider subscribing to my channel, ringing the bell, and giving a thumbs up. Check the description below for my free resources, including the Virtual Bookkeepers Toolbox, access to my Facebook community, and details about my Online Academy. Until next time, I'm Veronica Wask.

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