Tax Concerns When Choosing A Business Entity
When it comes to starting a business, there are a lot of different considerations, and many of the choices you will make are based on your preference—for example, based on how you want to manage your company, or how much involvement you want from shareholders, members, or partners. But many people form businesses and don’t give much thought to the tax ramifications of the business that they choose.
The easiest business to form and possibly to run is the sole proprietorship. Your paperwork and corporate formalities are lessened. However, there are few, if any, tax advantages to using this kind of business. All the money made by the business will be taxed—even money that may just be left in the bank, at the end of the tax year.
You do get business write-offs for business related expenses. Just make sure you keep separate records and books (and bank accounts) for your finances, and the business’ finances, and don’t use your own finances to pay for business expenses.
It’s also important to note that you get little or no asset protection benefits from a sole proprietorship, and little or no individual protection from creditor claims against the business.
S corporations get pass through taxation. This means that the income of the business passes to you, individually, and you are taxed on that money instead of your company. While this may seem like a disadvantage, it may not be, if you have personal deductions that you can take. It also minimizes the company’s tax burden, thus potentially maximizing profits or revenue.
Currently, there is also a 20% reduction in any business income that is passed on to you, so even though you pay taxes on what the business makes, you will only pay taxes on 80% of that income.
C corporations are at a bit of a disadvantage, because they are subject to being taxed twice. The business is taxed on its own profits (up to a 21% tax rate currently), and then shareholders, who receive dividends or revenue from the company’s profits, also get taxed. Unfortunately, the money the company pays to its shareholders can’t be deducted from the company’s profits, for the purposes of lowering its tax burden.
The law does allow shareholders to sell up to $5 million worth of shares, without paying taxes on the money received from those shares.
Limited Liability Companies tend to vary depending on the state. In many cases, a manager of an LLC can opt to be taxed individually on money made from the LLC, or it can opt to have the company pay the taxes. There is also the 20% deduction on pass through taxes, which can also be a benefit.
Call the West Palm Beach business litigation attorneys at Pike & Lustig today to see what the advantages and disadvantages are of every kind of business that you may be thinking of forming.