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episode 77 – control your bottom line by identifying your business entity, wisely
Looking for some critical tax planning advice that you can put in action now in preparation for next year’s tax return? Chris Axene, a principal in Rea’s Dublin office, is happy to oblige. On this episode of unsuitable on Rea Radio, Chris talks about business tax rates, business entity choices and how one ultimately impacts the other.
On this episode of our award-winning podcast, you will learn why the choice of entity chosen for your business is important from a legal and tax perspective as well as insight into which options are available to you. You’ll also learn which service professionals should be in the room when drafting up the paperwork required to claim your entity’s choice of entity.
The following are options for business owners:
- Sole Proprietor – Not technically an entity, this choice allows individuals to operate as a business and protect their personal assets. You might decide to be a sole proprietor if you are a freelancer or sell products online.
- LLC or Limited Liability Company – LLCs are highly flexible, and can have one or multiple owners. They can even make a tax election to be treated as an S Corp or C Corp. You might decide to be a LLC if you are in manufacturing or an entrepreneur.
- C Corp – For the past 40 years, C Corps have been considered a bad choice because both the entity and the owners are taxed for every dollar earned. Instead, most companies opt to register as a flow-through entity. If your exit strategy is to go public and get listed on the stock exchange, then you need to be a C Corp (or a flow-through entity).
- S Corp – An S Corp is a corporation with the Subchapter S designation, which allows the corporation to be treated as a flow-through entity.
Remember, a flow-through entity is a legal entity where the income of the entity is treated as the income of investors or owners. The entity still files tax returns, but it is not taxed individually. Both the LLC and the S Corp are flow-through entities.
When you are making this important decision and drafting the documents, it’s important to talk to both a tax planner and an attorney. You will find DIY document templates and cheap services online, but they are, by design, simple and generic. Ultimately, these documents may not address the realities of your specific situation.
If you have been in business for a long time, you should not ignore or forget your business’ choice of entity. As laws change, there might be new advantages or disadvantages to each designation. There will likely be significant changes to tax law over the next few months and years, so the sooner you can revisit your choice of entity, the better.
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Are you an entrepreneur who wants to take advantage of the benefits often awarded to small-to-midsize business owners? If so, you may want to consider establishing a limited liability company or an S-corporation. Both options offer several distinct advantages depending on the size and scope of your business and it’s even possible to combine the two – potentially providing you with the best options of both worlds. Here’s a quick overview to provide you with a little more insight into what you should expect when considering your organizational structure.
Reducing Uncle Sam’s Tax Bite on the Sales of Your Business – The financial focus in any business sale should be maximizing the present value of the after-tax amount received. Business owners and advisors must minimize the tax bite, as well as maximize the price. Keep reading to find out more.
When Are S Corporation Distributions Taxable To The Shareholder? – There are certain ordering rules that apply which will impact taxation. Read on to find out what they are.
Corporate Executive Compensation – The IRS is taking steps to ensure companies comply with employment and income tax requirements relating to executive compensation. Its goal is to improve tax compliance by corporations and high income taxpayers. Read on to learn more.
Making It Work: Three Keys For Establishing A Successful Minority Shareholder Relationship – In my experience, business owners who think about adding a minority shareholder are usually facing financial hardship or are trying to figure out a succession plan. Sure, this option has its share of pros, but the list of cons is just as long. Read on to learn more.
Tax-Free Stock Option Exists For Some Small Businesses – Back in the early 90s, Congress passed a tax provision designed to increase investment in America’s small businesses. And while the provision’s name, IRC Sec. 1202, may not roll off your tongue very easily, it’s one that some small business owners need to know. Keep reading to learn more.
Click here to read the official transcript for episode 77: control your bottom line by identifying your business entity, wisely.