Some small businesses develop gradually, transforming from a part-time hobby to a full-time operation. Others go from zero to a hundred in just a few weeks, as entrepreneurs turn ideas into profitable enterprises, seemingly overnight. In either case, it’s easy to overlook certain details, such as how the business is structured. After all, there are more pressing concerns in bringing a product or service to market.
Certainly, it is possible to run a business without making a deliberate decision on which business entity is best. The company defaults to a sole proprietorship or partnership. However, from a tax perspective - and a liability perspective - leaving your business structure to chance can be costly. Other options may offer better protection for your personal assets, as well as significant savings on your tax bill.
Weighing the pros and cons of each option can get complicated. Fortunately, your Certified Tax Coach can help. These experts think outside the tax box to guide you on selecting and implementing the business entity that benefits you most.
Simplicity vs. Tax Savings
Sole proprietorships and partnerships are the default business structure because they are so simple. A quick registration and minimal fees are all that you need to get started. The downside is that you might find yourself paying taxes twice on the same income. You owe taxes on any profits earned by your company, then you pay tax again when you file your personal returns. An additional concern that comes along with sole proprietorships and partnerships is liability.
For legal and financial purposes, you and your company are a single entity. Business creditors may be able to settle debts by going after your personal assets, and any legal claims against your company can be held against you personally. While the level of simplicity does make sole proprietorships and partnerships tempting, you might discover that the tradeoff of a higher tax bill is more than you are willing to pay.
Conquering Corporate Complexity
It’s true that C-Corporations are primarily reserved for massive companies with millions, or billions, in revenue. The cost of creating and maintaining such a business structure is rarely practical for smaller organizations. However, that doesn’t take the corporate structure off the table altogether. S-Corporations are much simpler than their larger C-Corporation peers, and they offer many of the same advantages.
One of the biggest benefits of a corporate business structure is how taxes are handled. Shareholders may pay capital gains taxes or taxes on dividends, but the issue with double-taxation on the same income is eliminated. Another important benefit to this type of business entity is the complete separation of personal and business assets. Financial and legal issues that come up for the business aren’t transferred to corporate shareholders.
The Best of Both Worlds
When a sole proprietorship or partnership isn’t quite right, but incorporating doesn’t make sense for your business, you do have another option. A Limited Liability Company, also known as an LLC, offers important features that keep taxes and liability low, without excessive fees and paperwork for setup and maintenance. This business entity is built to be flexible, so it adapts as your company grows and expands.
How you structure your business can be as important to your bottom-line profits as the amount of product you sell. The business entity you choose dramatically impacts your total tax expense, which can mean the difference between a good year and a great one. Partnering with your Certified Tax Coach to evaluate your options ensures your business is structured in a manner that makes sense with your total financial plan.
Learn more about choosing the best business entity for your company, minimizing your taxes, and building your wealth by working with a Certified Tax Coach.