BottomLine Lawyers

Is It Time To Rethink Your Business Structure?

This is the time of year many of my business clients begin thinking (or doubting) how they’ve defined their businesses. 

Should you be a “C” or an “S” corporation?

Should you evolve your LLC into a slightly different version of an LLC for tax or inheritance purposes? 

We get a LOT of these questions, and there’s often no simple answer for them, so this month, I want to take some time to go over some of the options – and try to share some of the tax benefits and liabilities of all of them.  Let’s start with the big ones – the C- and S-Corps and I’ll share some of the LLC information as the month goes along. 

From a strict definition point of view, the S-Corp is “a type of corporation that meets specific Internal Revenue Code requirements. The requirements give a corporation with 100 shareholders or less the benefit of incorporation while being taxed as a partnership. The corporation may pass income directly to shareholders and avoid double taxation.”

By contrast, a C-Corp is “a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity. C corporations, the most prevalent of corporations, are also subject to corporate income taxation. The taxing of profits from the business is at both corporate and personal levels, creating a double taxation situation.”

Right away, you can see that the C-Corp has that scary term, “double taxation” – the truth is, the S-Corp is considered a “pass-through” entity, much like the LLCs that many small business owners are familiar with.  Yes, a C-Corp will “tax” you twice, but the benefit is the ability to grow exponentially and protect your individual assets holds a great deal of appeal to many companies – especially those that expect to be 7, 8, or 9 figure businesses in the future. 

The reality is, most business owners who are considering the shift to an S- or a C-Corp are likely better served with the S-Corp, but certain industries – like tech, some retail, or companies that are expecting to franchise quickly – might find the C-Corp designation better in the long run. 

Another handy tool that a lot of tax professionals might share with you is this:  if you aren’t doing over a million dollars a year in income, stick with an S-Corp. 

…And while I would love to talk to you about making that move, I also want you to be aware of the various options that the LLC offers, too.  As you’ll see in the coming emails this month, there are a lot of ways to define your LLC – and even set up the tax structures – that give you many of the benefits of the C- and S-Corporations without the hassle and expense. 

Remember, it’s a process, and one that is based on growing a business, not merely building it and hoping it will be the right one. 

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