What Type of Business is Your Business?


“The beginning of the work is the most important”– Plato

Probably the most frequently asked question is “What type of entity should I conduct business in?”

Obviously, every situation and business is different, but I thought I would give some general rules based on an analysis of the new tax law, that will serve as some guidance, I would bet that few of you have gotten this information from your accountant.

  1. If you expect losses when you first start your business or for a short period of time after you start up, you should operate as either a sole proprietorship or LLC. The reason is that if you have losses, you can use those losses on your personal tax return. If you were a corporation, these losses might be trapped in the corporation and only used by the corporation. Once losses are not a problem, you can always change to another entity.
    Note: If you have a business that has high liability exposure, you want to to the LLC route and NOT operate as a sole proprietorship due to the unlimited liability exposure of sole proprietors. If you are starting up a network marketing business, your liability exposure is small. Thus, starting off as a sole proprietorship is usually best.
  2. If you want to accrue capital for future marketing, operate as a C Corporation: The new law taxes corporations at a flat 21% rate. However, you will need a good business reason documented in your corporate minutes or you can be hit with an accumulated earnings penalty. See a good accountant or lawyer about this.
  3. If you have several owners and want to distribute most or all profits annually, operate as an S Corporation. This usually results in the lowest overall tax due to the new 20% pass through deduction.
  4. If you expect to operate your business for at least 5+ years and then want to sell out, become a C Corporation. C Corporations, who qualify as small business corporations, can have a BIG benefit, When the stock is sold, the stockholders can avoid all tax up to $10 million in gain. Yes, they can sell their stock and avoid tax on the first 10 million dollars of gain. However, you have to be in existence for at least 5 years and have assets of less than 50 million.
    Also, you can’t qualify for this benefit if:
    • A service business in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services
    • A banking, insurance, financing, leasing, investing, or similar business
    • A farming business
    • A business involving the production of products for which percentage depletion can be claimed
    • A business of operating a hotel, motel, restaurant, or similar business.
  5. If you are a specified service business and make over $415K of taxable income ( married) or are single and earn over $207,500, you should consider being a C corporation since you won’t be eligible for the 20% pass through deduction.
    A specified service business is one that is:
    • legal
    • medical
    • actuary
    • accounting
    • financial services
    • consulting
    • athletics
    • performing arts
    • any business whose reputation is the major asset in the business such as possibly realtors.
  6. If you are NOT operating a specified service business (such as a networking business or franchise), consider operating as either an S Corp or C Corp. This is especially true if you are married and earning over $415K or taxable income or over $207,500K of taxable income and single since there are limitations to the 20% pass through deduction based on wages. Being a corporation will allow you to avoid these limits with wages.

Hopefully, this analysis will give you an idea of how to choose the best entity for you from a tax standpoint. Feel free to print this out as a reference and also to show your friends.

All content on this site is the property of Taxbot, LLC and/or Sandy Botkin. You may link to any article that you wish, or share via the social media buttons below. However, please do not copy articles or images for use on other sites without express written permission.

You have already voted for this post.
Powered by Devhats