Making a Start

Over the past decade, I have helped hundreds of business owners make a start at their new businesses. Years ago, when I decided to open my own firm, I documented my own process of starting a new business and became my own “very first client”.

One of the questions that people ask themselves when beginning a business is, “Should I open my company as an LLC”? It’s the number one question I get asked as a CPA.

The answer isn’t the same for everyone. Sure, there are certain tax deductions that you become eligible for operating as an LLC, but they don’t come with the magical powers people seem to believe they do.

When looking at it from a tax perspective, there are three types of entities that I consider:

Disregarded: A legal entity that doesn't file a tax return.

Disregarded entities are nothing thrilling from a tax perspective. This isn’t a structuring that is designed to help save on taxes but rather for purposes such as asset protection, privacy, and probate avoidance.

Pass-through: A pass-through entity files a tax return but doesn't pay taxes — rather they pass activity to owners through a K-1.

There are many different types of pass-through entities — LLC's, LLPs, LPs, PCs, PLLCs, Incs, etc.. These have different legal characteristics, and all are useful for different reasons, but all of them pass through for tax.

One of the more popular types of pass-through entities is S-Corps. Creators and small business owners use S-Corps to avoid paying some payroll taxes, which are 15.3% of earnings.

Owners can also pay themselves a reasonable salary. This allows them to divide their employment from their ownership and pay themselves a salary, oftentimes saving thousands in employment taxes.

The most profitable S-Corps can also optimize for the Qualified Business Income deduction by saving a 20% deduction on company earnings.

C-Corporations: This entity files a tax return and pays tax.

Every company that is publicly traded in the United States is a C-Corp.

One of the biggest benefits of being an S-Corp is the Qualified Small Business Stock (QSBS). This allows the original issuance shareholder to hold stock for 5 years and claim a 10 Million dollar exemption on the gains on stock.

C-Corps also pay a 21% tax rate, which can be a benefit for those looking to compound at a lower rate and reach objectives at a quicker pace.

Folks often spend too much time thinking about procrastinating over which entity to choose. Instead of wasting so much time doing this, use your brainpower to determine your accounting setup and how you will acquire your initial customers.

As always, while I am a CPA, I’m not your personal CPA. I highly stress that you seek professional guidance from someone who understands your situation directly.

Until next time,

Mitchell

P.S. If you made it this far and enjoyed what you read, send this to a friend who might like it!

P.P.S. My friend Scott Hambrick and I have been working on a podcast! It’s called Stupid Tax - covering taxes, small businesses, and a whole lot more. This weeks' episode - Accounting - What is it good for??