If you have a business or are thinking about having one, pay special attention to this blog. Too many people jump into business without thinking about asset protection and tax planning.
Or, they jump into a business structure because they heard they are the best entity around.
Business Structures Do Two Things For You
Business structures are an important part of business strateiges. First, they are necessary for asset protection. If your business is run solely in your own name, you risk your personal assets if anything goes wrong with the business. And, in today’s litigious society with lawyers on every corner, it’s way too easy to find someone who wants to sue you.
Even if you want to keep it simple with a Sole Proprietorship (Schedule C), don’t skip having a business structure to protect your assets. A single member LLC will help you with that, unless you’re in Florida, Colorado or Arizona. Proceed with caution in those states since the single member LLC isn’t always that strong. Check with your advisor.
In general, though, the best business structure is a corporation. That’s because you can avoid the extra self-employment tax of 15.3%. This is not assessed on corporate income.
NOTE: You can either form an S Corp or C Corp directly or form an LLC that elects to be taxed as an S Corp or a C Corp.
The question, though, is what is the best corporate structure for your business. S Corp or C Corp?
Why Should You Choose a C Corporation?
You should choose a C Corp, over an S Corp:
If you plan to go public,
If you plan to use a ROBS plan to invest your pension in your business,
If you have a lot of employee benefits you want to personally take advantage of, or
If you are at a higher tax bracket (higher than 21%),
Then a C Corporation might be best.
When Doesn’t a C Corporation Work?
A C Corporation might not be best if:
Your tax bracket is lower than 21%,
You spend every penny you make,
You don’t have a lot of tax-free benefits that you want to take,
You aren’t committed to keeping good records (or finding someone to do that for you),
You are going to accumulate appreciating property,
Your C Corporation runs at a loss,
You have a problem with one of the C Corp traps.
Potential C Corporation traps could be double taxation (by taking dividends out of the company), personal holding company income penalties and accumulated earnings tax.
You can avoid all of these traps by planning first. Talk to an expert and keep watching the blogs at USTaxAid.com. We’re going to be focusing on C Corporation strategies. It’s the hot planning tool now. In the right circumstances, they’re great. But if they aren’t right, you can have problems.
If you don’t have a business structure yet, carefully consider which is the best one for you now. Most people start with a single member LLC. Be careful if you’re in Florida, Arizona or Colorado, though. The asset protection with the single member form of the LLC isn’t as strong. You may need to add another partner or consider a different structure.
Come join us at Wednesday Coaching. We discuss topics like this and other important business and real estate investor strategies on the 1st – 4th Wednesday at 5 pm Pacific.