We hope that this letter finds you safe & healthy!
Entity selection is one of the most important decisions a new business venture has to make. The choice you make about the structure of your business will affect how much you pay in taxes, the level of risk to your personal assets, and even your ability for funding. Our firm can help advise on the proper balance of legal and tax benefits when choosing how to operate your business. Items to consider when forming a new business include:
- Liability Protection – Creating a separate legal entity for your business such as a Limited Liability Company (LLC), S-Corporation or C-Corporation, provides a layer of liability protection that (if conducted properly) can shield your personal assets from business-related debts and legal issues. Many small businesses operate as Sole Proprietorships which offer no additional liability protection.
- Taxation – The entity structure you choose will have the biggest impact on your tax liability. In LLCs, S-Corporations and other flow-through entities, earnings “flow-through” to the owners who are then taxed on the earnings of the business regardless of how much money is distributed out. One advantage of these flow-through entities is that they avoid a separate business tax. C-corporations pay a separate business tax but also allow for tax options that make them an attractive choice in certain situations. Sole Proprietorships are taxed directly to the business owner on the owner’s individual tax return – This removes the need for a separate tax return but also provides a road map to the IRS in case of audit.
- Administrative Burden – While the legal and tax considerations mentioned above are important, the administrative burden and cost of the entity choice should not be ignored. Creating a separate entity can require another tax return to be filed and can also involve payroll setup. The entity choice must be practical for the level of revenue and complexity of the business.
We are here to assist our clients in navigating the intricacies of choosing an entity structure for their business. We have experience with all entity types and can advise on the best strategy for your unique business situation.
Please do not hesitate to contact us if we can be of assistance with your business formation or ongoing business operations. Similar legal and tax considerations also apply if you have or are considering purchasing real estate.