As a responsible business owner, you must maximize profit while minimizing taxation. Tax efficiency revolves around developing strategies that allow you to pay the lowest amount of tax allowed under the law.
The decisions you make regarding your business structure when you first launch your company — or later when you reorganize — could increase your overall tax efficiency. There are several options for business structures you’ll want to consider. Over time, as your business expands, you may find that a different structure suits your needs better in terms of tax efficiency and other benefits.
Which business structure offers the most tax-efficient option for the size and scope of your business? When should you think about reorganization to reduce tax liability?
Personal Liability Enterprises
There are several ways to structure your business, but they fall into two main categories: personal liability and corporate entity. Under the personal liability category, you’ll find sole proprietorship and partnership.
As a sole proprietor, you’ll have only one employee (you), and you’ll enjoy total control of your business. You’ll also take on unlimited personal liability for your business, and you’ll be responsible for paying self-employment tax and personal tax.
You keep all the profit from your business, and this simple structure means you can file using your Social Security number (rather than generating an employer identification number or EIN), and you can use personal bank and credit accounts. You may be eligible for a range of deductions that could help to reduce tax liability.
Partnerships are businesses that consist of two or more people. In a general partnership, partners share both liability and control. In a limited partnership (LP), a general partner takes on unlimited liability but often has decision-making power over partners with limited liability. In a limited liability partnership (LLP), all partners enjoy limited liability (against the actions of other partners), while control is shared.
Business owners are responsible for personal and self-employment tax, except in LPs, where only the controlling partner is responsible for the latter. Again, this structure is designed for simplicity, but legal protection is sacrificed in the process.
Corporate entities hold appeal for businesses with more than one employee for several reasons. Generally, creating a corporate structure results in personal protection against liability. They may also offer tax advantages.
Limited Liability Company
A limited liability company (LLC) is a sort of hybrid of personal and corporate entities. It features one or more people and can be treated as a single entity (with its own tax return), a partnership, or a corporation, depending on how it’s structured. Owners aren’t personally liable, and taxation is flexible and based on structure.
C Corp and S Corp
Setting up a corporate structure for a business with one or more employees comes with some expense and hassle. They must be registered, have an EIN, and have shareholders, directors, officers, and a board of directors, among other requirements.
While these structures eliminate personal liability, taxation can be complex. A C corp is subject to double taxation (corporate and personal). An S corp is a pass-through entity, subject only to personal tax, but there are additional rules regarding the number and status of shareholders. There are other corporate entities you may want to consider, but these are the most common.
Changing Your Strategy
Once you’ve chosen the most tax-efficient strategy for your business, you may think you’re stuck with it, but this isn’t true. If your business grows or shrinks, you take on new partners or investors, you are acquired or merged with another company, or you simply want to reduce liability and increase tax efficiency, you can change your corporate structure for greater advantage.
Are you starting a new company in Prairieville or South Baton Rouge? Are you interested in greater tax efficiency for your established business? Contact a qualified business or tax law attorney at Kallio Law Firm today to learn more about solutions tailored to your business.