Starting a small business : Step 1 Choosing a Business Entity
If you are considering starting a small business, I'm sure you have googled it and found several websites with the different steps to take. Over the next several weeks, I will be delving deeper into the individual steps the U.S. Small Business Administration lays out in this blog post. Step one is Choosing a business entity structure.
What is a business entity structure
There are two main ways an entity's structure is view. There is the legal view, and then there is the tax view. A lot of people get confused by this, but it is important to see them differently.
The legal view deals with how an entity protects its owners from lawsuits and dictate how the business is run, which is detailed in an operating agreement.
The tax view deals specifically with how the IRS and state tax agencies view the entity and tax it's profits.
Is the entity structure really that important
Yes, first if the legal entity is set up correctly, you can limit your personal assets exposed to collections from lawsuits or bankruptcy. It also clarifies the relationship between the owners.
Second, having the correct tax structure can save you thousands to tens of thousands of dollars of taxes.
What do I recommend?
For the legal entity, I always recommend an LLC. It has the best-limited liability protection and allows you, by filing the appropriate paperwork, to classify the LLC as a Sole-proprietorship, Partnership, Corporation, or S-Corp for tax purposes.
For the tax purposes, I recommend that individuals that expect to make less than $20,000 in net profit per year and intend to have one member to classify there LLC as a Sole-proprietorship, more than $20,000 and 20 members or less I recommend classification as an S-Corp, more than 20 members possibly Corporation.
By paring an LLC with the above tax classification provides for the best legal protections while reducing the tax burden of the business.
If you're not sure if your business would benefit from changing from a sole-proprietorship to an S-Corp check out this calculator and if the above looks too complicated for you to figure out contact us at Walston Advisory Firm and we can connect you with attorneys who can help with the legal side, and we can help with the tax side