entity

What is the Difference Between an LLC, S-Corp, C-Corp, and Sole Proprietor?

Business owners have several choices of how they can operate their business. The decision should be well thought out and be able to meet your objectives. Here are some of the pros and cons of each structure:

The easiest form of operating your business is as a sole proprietor. A sole proprietor has a lighter administrative burden because you account for your business activity on your individual tax return. Also, you may not need to file quarterly payroll tax returns, and may not need worker’s comp insurance. The downside to operating as a sole proprietor is unlimited legal liability, high self-employment taxes, and a greater potential to be audited by the IRS.

A limited liability company offers greater legal protection than a sole proprietor, and is also extremely flexible. You may have the option to be taxed as a sole proprietor, partnership, C-corporation, or S-corporation. Usually, single-member LLC’s are taxed as sole proprietors, which means that you have the potential to pay high self-employment taxes.

A C-corporation offers legal protection like an LLC. The drawback is that you have to abide by more legal formalities, and also pay corporate taxes.  Then, when you want to distribute the profits, you will pay taxes yet again as a dividend. C-corporations have their place, but are generally suitable for larger corporations.

A variation of the C-corporation is the S-corp. An S-corp operates just like a C-corporation, but avoids the corporate level tax by taxing profits on the owner’s individual tax return and potentially saves self-employment taxes. The downside to an S-corp is a higher administrative burden.

As you can see there are many pros and cons to each business structure and the decision should not be taken lightly. If you are thinking about choosing or changing your business structure, please call our office so we can advise you.

Backwards Tax Planning

The title of this article should really be “Proactive Tax Planning.” Backwards tax planning is what you want to avoid by taking steps to minimize your taxes throughout the year. Steps you should be taking throughout the year include:

Businesses:

Entity Selection: The entity that you use to operate your business has a very large impact on your tax situation. Although there are ways you can make changes to the way your business is taxed retroactively, there are additional hurdles you will have to jump through, and there is no guarantee that your elections will be accepted. Generally, these elections have to be made within the first 75 days of the year.

Large Purchases: This includes purchasing vehicles and equipment, which must be placed into service before the year is over. If you were looking for a large deduction for 2014 and have not done so, then it is too late.

Timing of Receipts: If you are on the cash-basis, which means that you record sales when your customers pay you, then you can delay sending out December’s invoices so that you can get paid in January.

Individuals:

Investment Planning: The nature of your investments can have a large impact on the amount of taxes you pay, especially if your investments generate a lot of income. Your investments should be allocated to be tax-efficient.

Benefit Elections: Some elections can be made at any time during the year, but others, such as FSA (flexible spending accounts) and dependent care accounts usually need to be made at the end of each year.

Charitable Contributions: Properly planned charitable contributions, including donations of appreciated stock or valuable household items can produce an excellent tax benefit.

There are numerous tax strategies that can be employed, but you must be proactive to be able to take advantage of them.