CHOOSING A BUSINESS STRUCTURE
Recent tax law changes could impact your business and tax burden, depending on your business structure. We’ve put together a short overview about the four different types of business structures for educational purposes – this is not to be considered tax or legal advice and should not be used in an attempt to avoid tax penalties, but rather to help in choosing a business structure that may be suitable for you. Set up a consultation appointment with FSG today for specific information about the appropriate business structure for you. Each type has its own benefits and drawbacks, especially in context of the 2017 Tax Cuts and Jobs Act which makes some key changes to the previous rules.
This is the most simple of the structures, it allows business income to be included an individual’s personal tax return. The major benefit is the simplicity of set-up, and it is easily maintained. Unfortunately, it does expose the owner’s personal assets, such as property, and it does not present the same polished image as a corporation or LLC creates.
As a completely separate legal entity, a C-Corporation is separate from its owner and will survive past the death of the owner. This makes it easy to manage the financial aspects of the business independently. The major advantages come in the form of tax benefits, such as allowing for greater business expenses. Unfortunately, this is the most expensive structure to set up, and income may be subject to double taxation, between the corporate level and owner’s dividend income.
An S-Corporation is a route that owners of a new corporation can elect into via an IRS form 2553. These S-Corporations are taxed similarly to Sole Proprietorships, which effectively avoids the double taxation C-Corporation owners may experience. Since income is passed to shareholders, which must be fewer than 100 in total, the owners are protected from personal liability for a company’s financial obligation. Unfortunately, these do not offer the full effects of tax deductions that C-Corporations are granted.
Limited Liability Company
A Limited Liability Company (LLC) is a mix between a corporation and a sole proprietorship. These do not contain stock, despite being a separate entity such as a corporation. These require more set up than a sole proprietorship.
Advantages: LLCs provide the protections of a corporation, but are taxed similar to a sole proprietorship.
Disadvantages: Typically more expensive to form than a sole proprietorship, LLCs require more paperwork and formalized behavior.
Remember, the choice of business structure is not an irreversible decision. You may amend your business structure to accommodate your changing needs and circumstances.