Choosing
the right legal format of ownership of your successful business
venture, mainly for tax benefits and personal protection
(Please note that this material is primarily applicable to
the USA but the points outlined have relevance in most countries
of the world)
Because
most owners believe they must choose one legal entity, many do
not take advantage of the many features and benefits that other
entities afford. By understanding the tax benefits of each categorization,
business owners can save money and grow their company.
Inevitably, when meeting with a business owner, among the first
issues to arise is that of the business structure. Most
business owners profile their company as a certain type of entity
such as a Limited Liability Company (LLC), S-Corporation, C-Corporation,
or Limited Partnership. ( Note that in South Africa and Australia
the LLC is equal to the (Pty) and the S-Corp is equal to the Close
Corporation, CC) Typically they feel confident in the fit
of their chosen entity. It's interesting, however that their reasoning
is not always entirely correct, and, oftentimes it's apparent
the owner is not familiar with all of the options available. For
more information of how to "incorporate" your
business, click
here
For
a business owner to fully admit that they don't understand why
they use a certain entity over another is not unusual. Some offer
weak reasoning for their choice. For example, "My CPA
(accountant) says that this is the best entity available for such
and such reason." Or, "My attorney compared and
contrasted the best two entities and for me, this one is the best."
The particular business categories may have made sense in the
beginning, but business owners oftentimes realize they have outgrown
the entity with which they started.
Because
most owners believe they must choose one entity, many do not take
advantage of the many features and benefits that other entities
afford. By understanding the tax benefits of each categorization,
business owners can save money and grow their company.
It
takes a different mindset to fully understand multiple entity
structuring. However, business owners that own more than one business
may be utilizing the strategy without even recognizing it. For
instance, a business owner may have two companies one that
is a S-Corporation which allows him /her to utilize the self-employment
tax savings, while the other business is structured as a C-Corporation
which allows the owner to utilize medical benefits.
It
is important to understand that each business situation differs
and it's a good idea to consult a qualified tax advisor before
utilizing multiple entity structuring. For more information on
tax services available. click
here
Although
it has been in existence for 10 years in the USA, the LLC is the
newest entity available.. One of the main advantages of the LLC
is that it is taxed according to partnership law. LLC's
do not pay taxes. LLC's file an information return (Form 1065)
and all profits are reported on each member's own personal
1040 Form, according to ownership percentage. Another advantage
of LLC's is they can be owned by other entities. Under most circumstances
the members involved in the day-to-day running operations must
recognize the income as earned income and pay the 15.3% self-employment
tax.
The
S-Corporation, like the LLC, is taxed like a partnership.
S-Corporations file an information return (Form 1120S) and profits
are reported on each shareholder's own 1040 Form, based on ownership.
The main advantage of the S-Corporation is that a business
owner can draw income from the company. Business owners may
take a "reasonable " salary and distribute the
rest of the profits as stock dividends. Usually, the dividend
distribution is exempt from the 15.3% self-employment tax. One
major disadvantage of the S-Corporations is that only individuals
{not other entities} or certain types of grantor trusts may own
stock in the company.
The
C-Corporation is the only entity that actually pays taxes.
This entity files Form 1120 and is taxed according to a different
tax table than individual members. The primary advantage of C-Corporations
is their ability to provide tax-deductible benefits. These
benefits are usually not entirely deductible in the other entities,
but dividends are from 2003.
Another
main advantage of the C-Corporation is its lower tax bracket.
The first $50,000 that a C-Corporation earns pays only
15 percent in federal income taxes. This can be extremely beneficial
to a business owner that has expenses that are not deductible.
The
primary disadvantage of the C-Corporation is how dividend
distributions are taxed. Because dividends are paid after the
corporation has paid taxes on its profits, double taxation occurs
since the owner of the stock also pays taxes on the distribution.
(This falls away during the 2003 tax year) Another disadvantage
of the C-Corporation is that there are few ways to access
retained earnings without incurring the double taxations discussed
above.
The
Limited Partnership, like the LLC and S-Corporation is also taxed
like a partnership. It files an information return {Form1065)
and all profits are reported by each owner on their individual
1040 Form.
The
main advantage of the Limited Partnership is it has two
types of owners. The general partners have voting rights and control,
while the limited partners do not. This allows the general partners
to control the distribution of profits, even though they may have
been taxed at the limited partner's tax bracket
A
business owner with children over the age of 14 can utilize his/her
children's tax brackets as limited partners and not lose control
over the entity, even though the children may own a majority.
One
disadvantage of the Limited Partnership could be the business
owner's ability to access money within the partnership for his
or her own purposes.
Each
entity has both pros and cons. However taking advantage of all
of the pros while minimizing the cons should yield significant
tax savings. By utilizing the self-employment tax savings of the
S-Corporation and the lower tax brackets available in the C-Corporation
and Limited Partnership, an owner can save up to 30% on their
tax bill. If these entities are put together appropriately with
an LLC, it {the structure} can be easy to manage.
Most
business owners could find ways to spend the additional 30 percent
savings such as reinvesting in the business, improving cash flow,
and increasing employee benefits. While most businesses may only
use one entity, modifying the structure may be more profitable.
(Reprinted
with kind permission of the Utah Business Magazine)
Recommended
Services
-
Formation
of a new company - This service is the one-stop
resource for starting, managing and growing a small
business. Services include incorporation, LLC formation,
startup checklists, small business management, legal
filings plus many resources for setting up and running
a small business. Read
more.
-
What
is Your Business Worth - BizEquity is a provider
of interactive tools and data for the small business
community. The database includes more than 17 million
businesses, with estimated valuations, trend analysis,
industry profiles and helpful tutorials. BizEquity
empowers the business community to better understand
the estimated value of small businesses. BizEquity
valuations also help business owners understand how
they stack up to their competitors down the street
or across the country. Business owners can also compare
their own estimated business valuations against industry
and national benchmarks. BizEquity,
Corp.
-
Online
Incorporation and Trademark Services
- There are many different business structures
available, as well as the benefits which can
be gained through the incorporation process.
By using the Delamere Group's and Form-A-Corp's
extensive research section and our easy to navigate
website, you can begin and complete the incorporation
process in any of the 50 states in a matter
of minutes. As one of the nation's leading incorporation
services, you can be assured that you will have
the best information and customer support to
begin this important step in the business world.
Form
your new corporation or LLC!
-
Please
visit our web pages on other legal services, click
here.
"Back
to Business Problems for the Small Business Page"
