How you structure your business entity will depend a lot on your business model, the types of products and services you intend to offer, and the number of people it will take to deliver what you sell to your customers. A business model can mean a few different things, depending on the industry or who to whom you might be speaking. For example, companies that engineer products need both factory space and administrative offices. The IRS considers these distinct working spaces for tax deductions, which will impact the way that you file.
Firms that deliver services need only corporate offices. Some companies rely heavily on hiring contractors to fulfill the work they need. They may only need a few full-time employees. In this case, they are only responsible for collecting government payroll and other FICA taxes for their direct-hire employees. Any number of employees means you need to have an employee identification number (EIN) issued to fulfill these requirements.
Other companies use a mix of full-time, part-time, and contract labor services to give managers flexibility for changing demands of the business. Companies nowadays hire employees that can be successful working remotely. Registering for the taxation of business entities doesn’t have to be a nerve-wracking decision if you have a well thought out plan.
Stocks or no stocks?
At a high level, you can begin by deciding whether you want your company to have treasury stock that it can issue and sell. S-Corps have stocks. If you’re the only business owner, do you want to sell a portion of your business to an investor or partner later? Whoever owns shares of stock in the S-Corp is responsible for paying taxes on the portion of stocks that they own. S-Corps can have up to 100 shareholders of privately held stock, but there isn’t a limit on the number of employees. FICA taxes must be collected, recorded, and filed for every employee. For stockholders, however, the S-Corp income gets passed through.
Technically, an S-Corp can exist without employees if all income payments pass to its shareholders. Any distribution of salary payments to owners is calculated under payroll income rules and dividends from stock under IRS capital gains rules. The advantage of S-Corps is that, being partly compensated through payroll, the taxable income as capital gains is lower. Be sure to check with an accounting professional to see if your payroll style income falls under the Qualified Business Income Deduction (QBI) rules for 2018 to present.
Alternatively, C-Corps are publicly-traded stock companies with no limit on the number of shareholders. Each is required to have a Board of Directors. Any legal claims against the company remain with the entity, and officers and directors are not liable.
What makes Limited Liability Partnerships (LLPs) different?
Limited Liability Partnerships (LLPs) also function as pass-through entities for those registered as managers of the organization. Business owners with certifications such as attorneys, accountants, and other professionals who are required to operate under a state-issued license are usually better fits for LLPs. No single individual is responsible for paying taxes for the entire operation. If any partner fails to fulfill their legal obligation, under state law, the remaining partners can buy them out or remove them.
What are Domestic and Single-Member LLCs?
Limited Liability Corporations (LLCs), (D)LLCs (domestic), can also be called Single-Member Limited Liability Corporations (SMLLC) if you are the only owner and your company is not international. LLCs provide most business owners a great deal of flexibility when considering taxation of business entities. Most general consulting services choose to register as an LLC. Under the Tax Cuts and Jobs Act of 2017 (TCJA), LLC owners can deduct 20% taxable income up to $157,000. LLCs work very well with SEP-IRAs as a tax benefit since you can invest pre-tax income of up to $55,000 into your retirement account, thereby lowering your total adjust gross income (AGI). With so many options to consider, it’s smart to choose a good tax expert who can help navigate the ins and outs of any structure.
Sole proprietorships: the simplest business structure
Sole proprietorships do not need fictitious name registrations. Any name other than your birth name being used for business purposes must be registered with the owner, yourself, listed as an officer or manager of the company. You must complete the LLC paperwork and filing fee with the Secretary of State (SOS) and pay the annual registration fee. Then, you can take advantage of the designation to apply for qualified tax deductions. What it could mean for you is a higher net income when you itemize your business expenses to file your taxes.
Choosing or changing your business entity
Whatever business entity you are working within, it’s important to understand the benefits and limitations of how your structure will be taxed. This can be a little complicated, and you shouldn’t have to take time from running your business to untangle it all. Instead, consider working with a holistic tax expert to guide you through registering or even re-registering your business when its time. This individual and firm will have the knowledge and experience to guide you in matters of structure, taxation, and any other business financial matters that you have questions about, so that you can get back to doing what you do best: your work.
With decades of professional experience, SD Mayer wealth managers and tax professionals can assess your business and help you determine the best strategy when it comes to taxation of business entities. Contact us today to set up an initial consultation.