Right business entity types create great opportunities for tax planning

The right business entity selection is your key to business success. The choice can be one of the most confusing and important decisions a business owner faces and can either destroy or create great opportunities for tax planning.

Know yourself, your business and your goals!

You’ve already got a great service or product and enough courage to go into business, but before you team up, sign up and make it official, there are a couple more things to ask yourself:

Are you comfortable with your expectations of what your business can provide for you personally, both in the short term and long range?
Are you sure you’re considering the right business entity type that enables both your business and personal goals to be successfully met?

Do you know how your decision to do any of these things affects your choice of the right business entity type?

Build a strong business to sell for retirement
Build a good business and see your family run it after you retire
Go public
Use your “side hustle” to provide the basis for your IRA
Something else you might want to accomplish

Choosing the right business entity type

The entity type you choose can make or break your business, and not all types can be changed, or even be easily changed. Here are some more things to take into consideration as you begin to choose the right business entity type:

Whether all proposed owners are US-based. Foreign-based owners aren’t allowed to hold stock in an S corp, nor are partnerships or other entities.
If you plan to raise outside investor money, a C corp, which permits different classes of stock, will be a requirement for potential professional investors.
If you’re starting up to build and sell or go public within five years, your best choice could be an S corp.
Being committed to a social mission changes the dynamics of your entity choices and the timing of any changes.
If the whole decision of selecting a business entity type is more than you can wrap your head around, you could find yourself with some heavy tax burdens, liquidation nightmares and unexpected legal and accounting expenses.
Don’t worry, we can help you make the right decision.

The 4 business entity types

Each of the 4 entity types have different forms which become engineered platforms, or structures, which allow business owners to drill down and precisely follow their tax plan and hit their targeted goal.

Sole Proprietorships

Sole Proprietorships are businesses operated by one individual or a couple, and the business is not considered a separate entity from the individual (or the couple). They are flow-through entities (FTE) where profits and losses are included on the individual’s personal tax return, and they assume legal liability for business debts and lawsuits. Sole proprietorships also have the highest IRS audit rates of any entity because of their higher rate of errors.

Joint venture sole proprietorships are made up of the couple.

Partnerships

Partnerships are flow-through entities (FTE) where income flows through to investors or owners, so that only investors/owners are taxed on revenues, not the entity itself. The partners share the risk and benefits of the business.

General partnerships are made up of general partners who all participate in day-to-day operations and all bear responsibility for debts and liabilities of the partnership.
Limited partnerships have general and limited partners. The general partners continue with day-to-day operations and have liability for debts and actions of the partnership. The limited partners are more like investors than partners.
Limited Liability Partnerships (LLPs) are formed with general partners who are shielded from liability for the acts of other partners or employees and are similar to LLCs, but operate under partnership rules.

Corporations

Corporations are legal entities separate from the owners, whether the owner is one person or several, and provide a level of protection for the owners from legal action arising from company activities.

C corp: A C corporation is an independent entity that files and pays its own taxes. Money can be transferred to owners either as wages, if they work for the corporation, or as dividends. Benefits, such as self-insured medical reimbursement plans are also available.
B corp: An outside certification which is not a legal entity, but can be a good option to show that the company prioritizes its social mission and provides exclusive access to certain investors.
S corp: Combining characteristics of a partnership, the S corp offers legal protections for owners, and is also a flow-through entity (FTE).
PCs: Professional corporations are for professionals such as attorneys, doctors, architects and accountants to form a corporation. In this situation, each professional member of the PC remains liable for their own wrongful professional actions.

Other definitions and types of corporation forms, structures, descriptions, and names can include Business or For-Profit, Close, Controlled, Cooperative, Foreign, Non-Profit, Private, Public.

Limited Liability Companies

Limited Liability Companies are hybrids, shielding the owner from some business liability. All tax burdens and losses flow through to the owner, but are not subject to separate corporate tax.

Single-member LLCs pay taxes like a sole proprietorship
Multiple-member LLCs pay taxes like a partnership
Corporate-taxed election LLCs tax the LLC at the separate income tax rates that apply to corporations; leaving the owners’ personal income taxes unburdened by profits left in the company
Foreign LLCs are businesses set up in one state and are carrying out business in another state. Most states tax LLCs the same way the IRS does, but there are taxes and/or fees imposed by some states.

Use every tax planning benefit

What’s the right business entity for your business? Whether or not your business is new, chances are very good you’re not positive. You’re probably 100% sure you’re not using every tax benefit of that entity to the fullest advantage.

The bottom line

We establish and maintain a business and personal relationship with our clients. We know that Your BUSINESS is Your Life, and Your LIFE is Your Business and we take both seriously.

Call us at 479.478.6831. Use my Calendy Page (it’s easy) to set an appointment, or contact me by email melanie@radcliffcpa.com

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