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Choosing the right entity now can save you big bucks in taxes, legal fees and accounting fees in the future. Each is unique and has its benefits as well as drawbacks.
Remember, there is nothing simple about choosing the right form of business for your company and there are no quick answers. You will need an accountant or lawyer that is well versed in company structures to help you make the best choice for you, your family and your company. Your goals, anticipated growth, line of services/products, potential for having employees and financing requirements all need to be considered when making this decision.
I have provided a snapshot of the pros and cons of an LLC, Partnership and Sole Proprietorship in this issue. I addressed the C-Corporation and an S-Corporation in Part 1. These two articles will give you a starting point for considering the proper form of entity for your business. |
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| Limited Liability Company (LLC) |
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is the newest form of entity.
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can choose to be treated as a non-entity (i.e. Sole Proprietor), partnership or corporation for tax purposes. |
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income directly flows-through to shareholders (unless you elect to have the LLC treated as a corporation). |
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usually has a dissolution date. LLCs are most often used for limited life projects. |
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some states allow single-person LLCs. Most, however, require at least two shareholders. There is no limit to the number of shareholders an LLC can have. |
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there is no payroll for shareholders. Instead of employees, shareholders are considered owners of the business. Therefore, they are paid without withholding taxes. Each shareholder is required to pay estimated quarterly taxes as well as self-employment tax at the end of the year. |
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shareholders are taxed on their portion of the income whether it was distributed to them or not (unless the LLC is treated as a corporation). |
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some states tax LLCs much like corporations such as California. |
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some states impose an annual fee to keep the LLC active such as California and Wyoming. |
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LLC officers and shareholders are protected from the debts of the company unless they personally guarantee a loan or personally injure someone. |
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| Partnership |
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is easy to establish. A partnership agreement is necessary to describe how decisions will be made, profits and expenses shared, disputes resolved and how future partners will be added. |
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earnings are "passed through" to partners according to their partnership agreement. Whether the earnings are distributed or not, the IRS taxes the partners on their portion of the earnings for the year. Each partner is required to pay estimated quarterly taxes as well as self-employment tax at the end of the year. |
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partners are can be held liable for the actions of the other partners as well as their own actions. |
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each partner can be held personally liable for the debts of the partnership. |
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some employee benefits are not tax deductible. |
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don't hold meetings, elect officers or issue stock. |
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| Sole Proprietor |
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is the easiest and least expensive form of entity. You still need to register with your city, county and state government offices. |
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income directly flows to the owner. Income and expenses are entered on a Schedule C as part of your annual taxes on form 1040. |
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the simplest business to dissolve. |
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have unlimited liability. That's means personal assets can be taken to settle business debts. |
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some employee benefits are not tax deductible directly from business income. |
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sole proprietors must pay estimated income tax as well as pay self-employment tax at the end of the year. |
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| It is possible to change from one entity to another, it is complex and can be very costly, in terms of time, taxes, legal fees, accounting services and state registration charges. Take the time to find out which entity is best for you |
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| Quick Tip
This month's tip comes from Elizabeth of Philanthropy Communications Group ( http://www.pcgseattle.org )
Be wary of those invoice-looking postal mails that say (in tiny print) "this is not an invoice" but they have the whole tear-off part to send in with your payment, etc., and they look like a legitimate service you or your business associates might have signed up for (eg. internet listings, yellow pages advertising, etc.). The most vulnerable companies to this scam are those that have 2 or 3 business partners. They're in a real hurry and don't check with each other to see who ordered the service. If you would like to discuss your choice of entity in detail please email (Suzette@FlemmingBusinessServices.com) or give me a call at 406-216-2224. |
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