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Business structure determines tax liability

Business and taxes go hand-in-hand for entrepreneurs in the first few months of the year. This consideration is important because the structure of a business has future tax implications for the life of the company. Entrepreneurs must make this legal decision early on in a company's history, and due to future considerations, should do everything possible to get it right the first time.

Entrepreneurs can rely on the help of a business law attorney in the formation of their company. However, because the steps taken early in the formation process can often determine future success, it is important to understand the basics of business law at the outset of an idea.

Potential changes coming to business and tax law

A limited liability corporation (LLC) is often a favorite of entrepreneurs because of its flexible, yet simple, structure, but is an LLC always the right answer? There are pros and cons to every business, and potential changes to tax law under President Donald Trump could cause small business owners to reconsider their structure.

According to experts, entrepreneurs should always think about how they will make money in their business. Then, they should reflect how to retain or distribute earnings throughout the company. This plan can help determine if an LLC or a corporation is the correct structure.

LLC vs. C Corporation vs. S Corporation

In the United States, LLCs are not considered corporations. Therefore, partners in LLCs are subject to the self-employment tax and not a more generous corporate tax rate. A business that owns or deals with large amounts of real estate should consider forming an LLC.

When a corporation sells property, the company and its shareholders are subject to "double taxation," but because an LLC is not a tax entity itself, partners avoid paying double taxes on property.

Meanwhile, a C corporation is better for companies that want to attract a large group of investors who will eventually want shares in the company, also known as stockholders. C corporations can also be more competitive in terms of providing workplace benefits to its owners and employees.

An S corporation is often bigger than an LLC but is smaller than a C corporation. While LLC partners pay a self-employment tax on all business profits, S corporations allow owners to pass a portion of the tax burden through the company. However, S corporations are more limited in their shareholder and stock structures.

What is right for my business?

Entrepreneurs are among the most innovative people in a given industry. Although they are highly skilled and driven to succeed, business law and tax code can still be difficult to decipher. That is why the help of a business law attorney is available to those seeking sustained success in the future.

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