Business Advisory

 

Do you know which business entity is right for YOU? Are you “going it alone” not sure which entity you should file as? Below are some choices that you have. Choose wisely or it could cost you thousands (or more) in legal fees and taxes.

Sole Proprietorship (The 15.3% mistake):

 

The very basic form of doing business. Usually owned and operated by one person. The owner is 100% personally responsible for the actions and/or omissions of any employees of the business.

 

Pitfall: ALL PROFIT is subject to the 15.3% self-employment tax rate, regardless of whether or not it remained in the business checking account.

 

Partnership:

This occurs when two or more individuals decide that they want to go into a business together and portions of a business pie. They each put up an equal amount of money and equally share in the profits. When a loss occurs, they each put up more capital into the operation.

Pitfall: All partners are responsible for the actions and/or omissions of the other partners. Additionally, if a partner decides to leave the arrangement, the partnership must be dissolved.

 

Limited Partnership:

This entity takes on two types of partners, the general partner and the limited partner. The positive feature of this entity is that the limited partners have their risk limited to their capital investment. However, they are referred to as “silent partners” and accordingly, the have no voting voice in the operations. The limited partner can come and go without any impact on the continuity of the business operations. The general partners make all the operational and financial decisions of the partnership.

Pitfall: Limited partners have little to no control.

 

 

Limited Liability Partnership:

 

A limited liability partnership (LLP) is a partnership in which some or all partners (subject to local & state jurisdictions) have limited liabilities. This entity displays similar elements of other partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner's misconduct or negligence.

 

 

Limited Liability Corporation:

As defined by the Internal Revenue Service, a Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, and you should check with your state if you are interested in starting a Limited Liability Company.

Owners of an LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner.

 

Pitfall: The IRS does not recognize this entity as a tax entity. Subsequently, a tax election must be made. This usually means additional costs for the creator.

 

 

C-Corporation:

In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

Pitfall: The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

 

 

 

Sub-chapter S Corporation:

 

The Internal Revenue Service identifies S corporations as corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

To qualify for S corporation status, the corporation must meet the following requirements:

 

• Be a domestic corporation
• Have only allowable shareholders
  • May be individuals, certain trusts, and estates and
  • May not be partnerships, corporations or non-resident alien shareholders
• Have no more than 100 shareholders
• Have only one class of stock
• Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

 

Pitfall: Profits to shareholders are taxed at that shareholder’s tax bracket. Where this could be an issue, is when a shareholder’s adjusted gross income places them in a tax bracket greater than what the tax would have been for a “C-Corporation.”

 

Which entity is right for you? Contact the professionals at Congruent Strategies for a COMPLIMENTARY consultation to educate you on your options.