The choice over which business entity is right for your startup should not be made lightly. The positives and negatives of each must be weighed against others–and you’d better be sure you go into the decision with the facts straight! Entrepreneur magazine recently wrote of seven deadly myths that have often misled even savvy business owners into a mistake that can hobble their new companies:
Myth: An LLC saves taxes. The purpose of a Limited Liability Company (LLC) is not to provide tax write-offs, but to protect the owner’s assets. An LLC performs best and serves its owner’s interest most when used for holding assets or for governing partnerships between owners or other corporations.
Myth: A C-Corp helps small business owners save taxes. Large entities fit the typical profile for C-Corporations, as they require the unique structure provided for tax deductions–with few applicable to the average small business owner. Unless the business has very high revenues that allow the company to take advantage of corporate fringe benefits, the average small business owner will be better served by an S-Corporation, not least by avoidance of double taxation.
Myth: Corporations provide better asset protection than LLCs. It is not the entity itself that provides asset protection, it is the procedures that must be followed – i.e., following strict corporate guidelines, avoiding the commingling of funds, maintaining good corporate records – that creates the protective “corporate veil”. As long as you are following the right procedures, you will be protected whether you have a corporation or an LLC.
Myth: Setting up a Nevada or Wyoming Corporation will help save taxes and protect assets. No matter the state in which it is established, the states in which a company does business will impose a tax on its profits. Furthermore, if your home state is one of those that mandates registration in-state, like Minnesota does, that state’s laws will govern asset protection.
Myth: S-Corporations face a larger risk of being audited by the IRS. While an S-Corp run by small business owners do not have to pay self-employment taxes, the IRS is no more likely to be focused on S-Corp owners. All that is necessary is to avoid undue attention is to pay careful attention to your payroll allocation each year–ensure that it is reasonable and your company will stand at no greater risk of an audit than any other company.
Myth: Sole Proprietorships are a bad idea. Contrary to common assumption, a sole proprietorship can be the ideal business entity for someone only just entering the field. As your business is able to stand on its own two feet and starts to grow, the owner will be able to look at transitioning to other entities. However, as made obvious by the name, partners or investors do not go well with this kind of entity.
Myth: Using an online service to set up my business will save time and money. These days, there are countless websites offering to set up your business for pennies on the dollar. Though tempting, you should know that you get what you pay for. Choosing the right entity could save you thousands of dollars in taxes and administrative costs–the input of a Creative Business Lawyer™ can be invaluable in setting you on the path to success.
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.
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