For the ordinary worker, filing taxes is a daunting task. Taxes can be far more complicated for self-employed individuals and small-business owners than for the general public. Many of the 2018 tax year laws have been altered by the Tax Cuts and Jobs Act (TCJA) of 2017, which was signed into law in 2017. There has never been a time when selecting the appropriate business entity was more critical. As a result, it could either reduce or increase your tax burden.
Is it really that essential how a firm is structured?
The Trump Tax Plan will have a significant impact on your 2018 taxes, regardless of how much money you make from a side hustle or how much money you make from a successful firm. The tax year ends in a matter of months, so now is the time to take advantage of the savings opportunities available to you.
As a result, many entrepreneurs delay making a decision about their company structure. Do not engage an attorney or apply for registration with the state at all costs because it will be time-consuming and expensive. Taxes might be reduced by as much as 40 percent if you adopt the correct business structure. Hopefully, this will be sufficient motivation for you to discuss with your tax and financial consultants about the optimum corporate structure for your company’s needs.
If you have the proper business structure in place, your taxes will be less expensive. If you want to lower your taxable income even further, you can get guidance on the best retirement plans to choose.
For small-business owners, the following are the most distinct entities:
Self-employment (example: Freelancers)
Almost everyone who receives a 1099 form or manages a small business fall into this category. Think freelancers, independent contractors, small business proprietors, and so forth. In addition to their regular income, they must pay self-employment taxes. Because they are both an employee and an employer, they are effectively double their contributions to Social Security and Medicare.
Being self-employed does not necessitate the creation of any form of legal corporation. Pass-through deductions might lower your highest tax bracket to 29.6 percent if you qualify for the 20% tax break. Assuming you’re in the highest tax bracket, you can save money and preserve your assets by forming one of the following business entities.
S Corp. (example: Doctor, Financial Planner, Consultants)
Creating a corporate company is often motivated by tax considerations. When deciding whether to remain a sole proprietor or form an S corporation, asset protection is a close second. Because it is a “pass-through entity,” a S corporation is exempt from paying income taxes on its profits. Owners receive all of the company’s profits. Additionally, the S corporation is exempt from paying corporate taxes. The owners then pay taxes on their tax filings.
C Corp. is a corporation (example: Apple, Start-Ups, any big corporation)
The vast majority of publicly traded companies are C corporations. On the other hand, S corporations can have no more than 100 stockholders. A C corporation’s major issue is the potential for “double taxation.” Initially, the corporation gets taxed on its earnings. Dividends paid to shareholders are subject to the second round of taxation.
Consider becoming a C corporation if you’re starting a business for the first time because of the lower corporate tax rate of 21%. New tax law Section 1202 permits startup shareholders to sell their stock after five years, with no tax on the first $5 million gain. This is another significant win for entrepreneurs. We’re trying to support the next generation of businesses that create high-paying jobs.
The Limited Liability Company, or LLC (example: Landlords, Professionals)
When it comes to an LLC, there is some degree of flexibility. S corporation or sole proprietorship are all viable options for LLC owners. It is a legal rather than a tax classification that the LLC has. Keep in mind that LLCs are taxed in some states. While California charges a minimum of $800, other states only charge nominal fees, such as $35 a year. The 20% qualified business income (QBI) deduction may be available to the LLC owners as a pass-through entity.
The impact of a corporate structure on the security of assets
The ability to save money on taxes is a common reason for forming a corporation. Your choice of a company entity (if any) will affect the level of asset protection you can provide. Ask a lawyer: As a business owner, you’re bound to face a lawsuit at some point. Your liability will be reduced if you form an LLC or company between yourself and your actual business.
Corporations and limited liability companies (LLCs) can only be taken to court if they are sued and lost. Because of this, they can no longer go after your finances.
To preserve your asset protection and tax-favored status, you must have an operating agreement or bylaws in place, keep accurate books and records, and keep track of the minutes. Even while this may seem like an annual bother, it’s better than getting sued for your assets. Maintaining asset protection is critical to adhere to all applicable regulations and bylaws. For a price, some business formation attorneys will assist you in keeping your books and minutes.
Is it essential that you do so? Do you know which type of company is most suited to your needs? You should seek the advice of a competent CPA and financial advisor. Make sure you take the time to choose the best business structure for your needs. To incorporate, you may also require the help of a business formation attorney.
The Bottom Line
It’s important to think about the best business structure for your firm as soon as you start a company. This decision’s legal and tax ramifications might be far-reaching when launching a corporation. As a result, you must have a long-term vision for your company while deciding on a business structure.