Setup To Succeed
Selling more isn’t the only way to have more profit. How you choose to structure your business can set you up for healthier margins…or put you in an uphill battle from the start.
Choosing the right business entity can lower your income tax burden, provide you the ability to raise capital, and help you avoid unnecessary compliance and regulatory paperwork and fees. Choosing the wrong business entity could do the opposite. It’s in your best interest to know your options.
A business entity is formed as soon as a single owner begins activity trying to make a profit – a sole proprietorship. Beyond a sole proprietorship there are lots of entity types to choose from such as S-Corporation, C Corporation, Tax Exempt Organization, General Partnership, Limited Partnership, Limited Liability Partnership, Limited Liability Limited Partnership, alas the list goes on and on…
One For State And One For Federal
When deciding your entity type, you’ll want to make sure you are getting the most benefit from a tax standpoint but there are other things to consider. State law governs the legal organization of a business and federal law governs the taxation. For example, your business can be a LLC for state purposes, but for federal purposes you are either a partnership, S Corporation, or a Sole Proprietorship – each has distinct operational and tax effects.
Consider Changing As You Grow
As your business expands and your needs change, you may want to reanalyze your entity type. For example, with the adoption of the Tax Cuts and Jobs Act of 2017, it may be a tax benefit to convert your Partnership to an S Corporation.
When considering your options from a tax standpoint, there are many items to consider:
Income tax rate structures
The choice of your ending tax year
Tax return filing requirements
Tax treatment of losses
Special allocation of income and deductions that will be made between owners.
When a family business is involved, setting up the most beneficial structure for ownership succession is important. For example, a parent or grandparent may want to pass income and assets to the younger generations as part of an estate plan.
Another income tax planning goal may be to divert taxable income of the business to the taxpayer who is in the lowest tax bracket amongst the other owners. The ultimate question is how the entity ownership can be structured to reduce or deflect the taxable income to the owners.
How To Get Help
The advice of a tax planner can be invaluable in helping you reduce your tax burden, maximize your profits, and help you reach your goals. At Rock Creek Consulting Group, we will begin holding workshops to help with this topic and others. To be notified about upcoming workshops, go to: www.rockcreekcg.com, scroll about half way down the page, and click the “Subscribe Now” button under the “Stay Updated” section.