Business Entity Formation – Conquering the Confusion
by Teresa Silva, CPA, CCE
Edited by Patty Cochrane
As a business owner it can soon become overwhelming trying to decipher the various entity types available to you. I see many people every day and one of the first questions I ask is, “how is your business set up?” As a tax preparer, I need to know.
There are only three basic levels of business formation: sole proprietor, partnership, or corporation. Sole proprietors are taxed on a Schedule C, partnerships on a 1065, and corporations on an 1120. I ask this question to better determine which tax form your business fits into and to more accurately give you a quote.
Here’s where things get tricky, sole proprietors and partnerships are not afforded any protections under the law in case of bankruptcy or loss. A vendor or claimant can come after the owner’s personal property leaving the owner completely exposed to 100% loss. Most states have designated LLCs or Limited Liability Companies for these owners as a form of legal protection against loss, however, the taxing designation doesn’t change, a sole proprietor still files a Schedule C and a partnership still files a 1065.
Congress recognized that there are differences in large corporations and small corporations and, therefore, opened another option for small business owners and corporations alike. Essentially, they said if you are an LLC or a corporation meeting certain characteristics, then you qualify for taxing treatment as a small Subchapter S Corporation (S-Corp)
As we rush to the March 15th deadline to be recognized as an S-Corp, there is something for small business owners to consider before choosing this path – the cost. There is an incremental increase in cost to doing your taxes and a requirement to pay yourself a salary. That means that your net income, after you pay yourself and your expenses, has to break $12k to make this a reasonable leap for you.
If you’re unsure or have questions about how your business should be set up, please come talk to me! The tax savings for S-Corps in 2018 make this an unbelievably great opportunity for you to decrease the tax load you’re paying!
Teresa’s article was originally published on her LinkedIn