Embarking on a business venture entails numerous decisions, each wielding substantial influence on your success or failure. Among these critical choices, none holds greater weight than the selection of your business entity structure. This decision profoundly affects your business operations, tax obligations, record-keeping requirements, and asset vulnerability to lawsuits.
Out of the available business entities—sole proprietorship, partnership, corporation, or limited liability company (LLC)—it’s crucial to discern the most suitable option for your unique operation. In part one, we explored the initial factors to consider, and here, we delve into the remaining two key considerations.
Before finalizing your decision, consult with us, your Family Wealth and Estate Attorney. We analyze the factors below to guide you in selecting the optimal entity for your business.
Taxation
Your choice of business entity profoundly influences how your business is taxed. In sole proprietorships or partnerships, you and fellow owners are treated as one entity for both liability and tax purposes. Profits or losses are reported on your personal income tax return, taxed at your personal income tax rate.
Contrastingly, a C corporation is regarded as a distinct legal entity from owners, subjected to a flat corporate tax rate of 21%. After-tax profits are then distributed to shareholders, who are individually taxed on these profits. This “double taxation” requires the corporation to pay taxes, followed by shareholders paying taxes on their share.
Due to the complexities and expenses linked with traditional corporations, few small to mid-sized businesses adopt the C corporation structure. However, an LLC offers liability protection and tax advantages similar to a corporation without the added complexities.
An LLC provides flexibility in tax treatment. Single-member LLCs are automatically taxed as sole proprietorships, while multi-member LLCs are taxed as partnerships. In both cases, your personal income tax rate applies to your share of the net business income. Alternatively, you can elect for your LLC to be taxed as an S corporation, involving payroll, payroll taxes, and filing a corporate tax return.
Opting for S corporation taxation offers advantages, such as paying payroll taxes only on your payroll, not on profit distributions. This can result in significant payroll tax savings. However, for an S corporation election to be beneficial, a minimum net income of $75,000 per year is advisable. To navigate the taxation aspect, consult with us, your Family Wealth and Estate Attorney, or a Certified Public Accountant (CPA).
Administration & Operation
Sole proprietorships and partnerships, while lacking liability protection, are uncomplicated to establish and maintain. As a sole owner or with multiple owners, you automatically become a sole proprietorship or partnership without the need for state registration, paperwork, fees, or specific rules.
In contrast, LLCs and corporations offer liability protection but come with administrative requirements, commonly known as corporate formalities. These formalities dictate the structure, maintenance, and management of the entity. Neglecting these requirements can result in a court removing the protective barrier, exposing personal assets to creditors in a process known as “piercing the veil.”
Corporations are burdened with the most stringent and intricate administrative formalities, including filing articles of incorporation, holding regular board and shareholder meetings, creating and implementing corporate bylaws, and maintaining detailed record-keeping, such as comprehensive meeting minutes. Additionally, annual reports and fees are obligatory to maintain corporate status.
While LLCs also adhere to administrative formalities, they are less cumbersome than those for corporations. LLC owners must file articles of organization, create an operating agreement governing the entity’s structure, and file periodic reports with the state. Although not statutorily required, holding owner meetings and keeping minutes strengthens adherence to corporate formalities.
For corporations and LLCs, diligent record-keeping and maintaining clear separation between personal and business finances enhance protection from creditors.
As your Family Wealth and Estate Attorney, we assist in the creation and maintenance of your business entity records and formalities. Our comprehensive maintenance packages ensure compliance with these requirements, safeguarding your assets.
Seek Our Expert Guidance
Selecting, establishing, and maintaining your business entity is a task too crucial to tackle alone. Our expert advice aids in identifying the most advantageous entity for your business, ensuring proper setup, and offering efficient business systems. We establish a clear demarcation between your personal and business finances, crucial for maintaining liability protection.
Moreover, compliance with state laws and administrative formalities is monitored to preserve your entity and safeguard assets. Focus on growing your business while entrusting us, your Family Wealth and Estate Attorney, to handle these critical tasks. Initiate the process by contacting us today.
This article is presented by Michelle Bell, an expert in estate planning and business succession services. Our office provides comprehensive legal support for businesses, assisting you in making informed decisions throughout your entrepreneurial journey and in planning for future contingencies. We also offer a specialized session where we review your business’s legal structures. To arrange this consultation, please click the following link: https://calendly.com/mcblawpllc/30min.
The information in this article is intended purely for educational and informational use and should not be considered as advice on ERISA, tax, legal, or investment matters. For advice specifically tailored to your unique situation, such advice should be sought independently from this educational content.