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As an entrepreneur, selecting a business structure is a hugely important decision, and one that can have serious legal and tax implications. Make the wrong decision and you could find your personal assets exposed to business debts, be locked out of venture capital funding, or even end up paying much more in taxes.
One of the best ways of making the right decision when forming a business, is to consult with a firm providing specialist accounting and tax services in Miami; with their expertise and in-depth knowledge, they can guide you towards the most tax-efficient structure for your situation.
Let’s look at the entities in a little more detail:
Sole proprietorship: the simplest structure for a business, this requires no paperwork, no fees for registering, and no separate tax filing. Income from the business flows straight into your personal tax return, or Schedule C; personal and business assets are not separated.
Partnership: pass-through entities, meaning profits and losses flow through to the personal tax returns of partners, based on their percentage of ownership.
LLC: the most popular of all business structures, Limited Liability Company’s combine the liability protection afforded corporations, with the tax flexibility of a partnership. Single-member LLCs are taxed in the same way as sole proprietorships, while multi-member LLCs are taxed like partnerships. However, LLCs can choose to be taxed as S or C Corporations while holding on to their legal LLC structure.
S Corporation: you can actually form an LLC and elect S Corp taxation, or form a corporation and elect S Corp taxation. Although these are pass-through entities, a reasonable salary must be paid to the owner-employee, which is then subject to payroll taxes. any extra profit can be distributed as dividends, and are not subject to self-employment tax.
C Corporation: if you’re planning to go public, raise venture capital, or scale in a significant manner, this structure will likely be your go-to. As a separate legal entity, they can issue multiple classes of stock, and have an unlimited number of shareholders. Paying corporate income tax on any profits made, when dividends are distributed to shareholders, they are taxed again on the personal return of the shareholder, in something known as ‘double taxation.’
How professional guidance can help you make the right choice
While a tax specialist can certainly advise you as to the most tax-efficient entity structure for your new business, you can also take advice from experienced small business accountants to help you understand the best structure according to the state your business operates in (entity rules vary from state-to-state), and in terms of your planned future growth.
What is the recommended path for most new business owners?
Although every situation may be a little different, in the majority of instances, the following is the path most recommended for new businesses:
- Start by forming an LLC in your home state, as this will provide you with liability protection, flexibility in terms of taxes, and a smaller burden when it comes to compliance.
- If you consistently earn between $75,000 and $100,000 in net profit, S Corp election might be the best option.
- To clean up any issues should you wish to pursue investors, converting to a C Corp might be recommended by an accounting firm in Miami.
Remember that as your business evolves, so might its optimal structure. So whatever entity structure you choose for your new business, make sure to revisit your choice every year with your chosen tax and accounting partner. But irrespective of the choice you go on to make, it’s essential that you keep your financial records clean and organized, as failure to do so can undermine even the most sensible entity structure decision.
