CHOOSING THE RIGHT BUSINESS STRUCTURE
When you’re ready to start your own business, set yourself up for success.
Considering the pros and cons of each type of business entity
To make the most of any professional advice, it will be helpful for you to first have an idea of some of the features and tax saving opportunities each business structure offers, and which one might be most appropriate for you.
Let’s explore each one, with a score for each in terms of ease of getting started (scored 1-5, with 1 being easiest and 5 being hardest) and exposure to risk/liability (also scored 1-5, with 1 being least risky and 5 being most risky).
Should your business be registered as a corporation?
Corporations are established under state law for the purpose of conducting business. They are characterized by having a fictitious name (that is, not the name of the owners) so they can hire employees as needed to run the day-to-day business.
A very important feature of corporations is that, like limited partners in LPs, they usually allow owners to limit their liability to their initial investment.
For example, if $50,000 was made as a down payment to purchase a franchise, the entity would only be responsible for the $50,000 instead of the entire amount to purchase the business. Franchisees, or owner-employees, can generally receive an array of employer-provided tax-free fringe benefits.
For tax purposes, corporations are usually one of two types: C-Corp or S-Corp (each referring to the governing subchapter of the Internal Revenue Code). Corporations – especially C-Corps – are by far the most complicated entities, both to establish and maintain.
They require things like articles of incorporation, annual meetings, meeting minutes, corporate resolutions and more. The complexity is primarily because they provide a great deal of liability protection.
Which business structure is right for you?
Now that you have a basic understanding of the main business structures and you’ve considered the pros and cons of each, you may have already made an educated guess as to which structure is best for your new business. Perhaps you’re leaning toward the LLC structure, and you wouldn’t be alone. LLCs have become very popular because they’re fairly simple to set up; they provide the same pass-through tax benefits as a sole proprietorship, partnership or Sub-S Corp; and they offer the liability protection of a corporation. Still, this would be a good time to seek some professional guidance, just to be sure the structure you’re leaning toward is the best option for you.
The tax code is constantly evolving, making some business structures more attractive than others. A tax professional can advise you on things like the Qualified Business Income (QBI) deduction and other considerations to help you determine whether certain tax rules favor your use of one business structure or another.
As your business grows, proper planning and professional guidance can continue to help you limit your tax liability. Don’t forget that having to pay taxes is a good thing; it means you’re making money! Planning ahead and seeking out professional guidance will help set you up for success.
This material was prepared for informational and/or educational purposes only. Although the information has been gathered from sources believed to be reliable, we do not guarantee its accuracy or completeness.
Neither Edelman Financial Engines, a division of Financial Engines Advisors L.L.C., nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.