Blog

Call us: (801) 281-4700
Portal Login

Recent Posts:


  • PPP Loan Forgiveness ... HELP!

  • Employee Payroll Tax Deferral

  • Welcome Shields & Company CPAs

  • Which Business Entity is Right for ME?

  • Retirement Plan Options for the Self-Employed - while there's still time

  • Tax Cuts and Jobs Act - 2018: Taxation made simple

  • Tax Credits and Deductions for Business Owners

  • Business Owners Open Forum & Training Courses


  • Which Business Entity is Right for ME?

    Recently, several people have sat across my desk and asked "should I be an LLC?" The question seeks a black and white answer, but it is not as simple as "yes" or "no". In our March Client Forum we attempted to answer that question for those who participated.

    In determining which business entity is right for YOU we have to consider a list of items, then match your needs with the available choices. So, here is our list of things to consider.

    • Tax treatment
    • Cost of administration
    • Legal liability protection
    • Control – partner compatibility
    • Transferability of assets
    • Succession

    What are your most important considerations? Keeping your answers in mind, we compare them with the entity choices, which are:

    • Sole proprietorship
    • Partnership
    • Corporation
    • Limited liability company
    • Trust
    • Not-for-profit organization

    It is now worth spending some time discussing the characteristics of each entity choice.

    Sole Proprietorship

    • The default entity – if you don’t choose anything else, this is what you get.
    • Taxed and reported on Form 1040 Schedule C of owner, subject to SE tax
    • Lowest cost of administration
    • Lowest legal liability protection
    • Control all rests with owner – no partners
    • Succession choice is generally liquidation

    Partnership

    • General vs Limited
    • Must file Form 1065, income is taxed to partners; general (active) partner is subject to SE tax, limited (passive) partner is not
    • Can be easy to set up – most don’t have formal partnership agreement (but should)
    • General partner may have legal liability, limited partner may not
    • General partners have control, usually according to ownership percentage
    • Succession can occur by selling or gifting partnership interest, or by liquidation

    Corporation

    • Must have articles of organization, bylaws, annual report, stock certificates to evidence ownership
    • Liability is limited to assets in corporation
    • Control is held according to ownership % - option for classes of shares with varied voting rights
    • Entity can endure even though stock changes hands
    • Transfer of assets to/from any corporation causes a “deemed sale” taxable event –
      • รข??not a good choice to hold appreciable assets

    C Corp

    • C Corp files Form 1120 andpays federal tax at 21% under new tax law
    • C Corp dividends are taxed to recipient, not deductible by corp (resulting in double taxation)
    • C Corp can be a good choice for highly capitalized businesses

    S Corp

    • S Corp files Form 1120-S but tax is paid by stockholders
    • S Corp distributions are not taxed separately
    • S Corp election must be made unanimously
    • Corporations must compensate officers through W-2 wages (adds to cost of administration)

    Limited Liability Company (LLC)

    • Single member LLC defaults to Sole Proprietor tax treatment
    • Multiple member LLC defaults to Partnership tax treatment
    • LLC can elect C Corp or S Corp tax treatment
    • Most versatile, easy to set up
    • Legal liability is limited to assets in LLC
    • Operating agreement determines method of control, succession, etc.

    Trust

    • Trust has highest tax rates, files Form 1041
    • Costly to administer
    • Legal liability is limited to assets in trust
    • Control is set out in Trust Agreement, generally held by Trustee(s)
    • Good for transferring assets

    Not-For-Profit Organization

    • Not taxed on income generated in performing tax exempt purpose; taxed on unrelated business income
    • High cost of administration
    • Not for everybody

    For some, this bullet point disussion may be all you need to determine the best entity for you. However, it may be best to have a face to face discussion. The best advice comes from someone who know your business and situation as well as the consequences of each entity choice. As your accounting and tax strategy advocates, Anderson Bradshaw can help.

    Russ & Russ


    Russ Anderson | 03/08/2018