Deciding on a Business Entity: The 3 Decisive Factors
Have you got a new or growing company? One of the most vital and enduring choices a business owner will make is their business structure–so you’d better be sure to get it right! The decision will be felt for years to come in every aspect of your business: compensation, taxation, asset protection, and more. If you’ve clocked in more hours picking out which floor-tile is just-right than in giving thought to the operational structure of your business, you may well be doing a disservice to both your company and yourself.
Three decisive factors should inform your decision:
Managing risk. Did you know that anyone can sue anyone else at any time for any reason? It doesn’t mean that they can win, but they can sue. No matter how well-run your business is, someone somewhere is going to find a reason to sue you. It may not be this year; it may not be this decade, but you can expect to be burdened with a lawsuit or two given our litigious society. If you want to keep your personal assets out of someone else’s pockets, you need to protect yourself from potential business liabilities using a limited-liability company (LLC) or corporate structure.
Paying taxes. We know you would rather avoid thinking too much about the money you’ll be anteing up each year, but not every business structure operates under the same tax code. Sole proprietorships, partnerships, S-corporations, and most LLCs see their business profits and losses “pass through” to the owner’s personal tax returns–net profits are taxed accordingly. C-corporations and LLCs that elect c-corporation tax-treatment, on the other hand, are defined wholly separate from their owners, who do not report their share of corporate profits on their personal tax returns.
The more complicated tax structure can turn some away from giving corporations the thought they deserve, but there are pluses to weigh against the negatives. For example, many business owners take great interest in the lower corporate tax rate. Moreover, serving as an employee of your own corporation allows to pay self-employment taxes only on the salary you pay yourself–self-employment taxes don’t apply to shareholder distributions. Done right, this can be a boon to both you and your business.
Managing complexity. A sole proprietorship or partnership will typically require less tedious record-keeping and rule-following because they have no asset protection. Corporations and LLCs demand a more by-the-book approach, or else you lose the asset protection that those structures give you.
If you’re a small or mid-size business owner, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit. Normally, this session is $1,250, but if you mention this article and we still have room on our calendar this month, we will waive that fee.
Do you have experience in choosing a business entity? What other considerations would you recommend? Share your story in the comments below.
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