Since the passing of the Tax Cuts and Job Act in 2017 the consequences of how a business structures itself is more important than ever.
Tax considerations play a key role in determining whether your business is better suited to be a C Corporation or an S Corporation (pass-through entity), say tax advisors. The new law implemented a flat C Corp tax rate of 21 percent, a reduction from a previously graduated 15-percent to 35-percent tax rate.
A C corporation may be a good idea if the business wishes to reinvest earnings in the company, is looking to expand, wants to easily sell the business or wants to have greater flexibility to increase salaries and wages for employees.
On the other hand, C Corporations are subject to double taxation – its business is taxed at 21 percent and dividends paid to its owners are also taxed when they are distributed.
S Corporations, partnerships and sole proprietorships, (also known as pass-through entities) don’t pay taxes outright. Instead, all profits, losses and other taxable items are “passed through” to stakeholders and partners and they then report that income on their individual tax returns.
A sole proprietorship, which is the most common form of business organization because of its ease to form, and a partnership structure, are frequently used because they allow the owners greater control over their business. However, these types of entities also expose the owner or owners to liability, as they assume responsibility for the financial dealings of the business.
An S Corp. can be an ideal structure for a business that expects to consistently distribute earnings. While the main advantage to having a corporation is liability protection, tax rates are should also play an important role in your decision.
Another business structure gaining popularity, is a Limited Liability Corporation. An LLC allows the owners to take advantage of the benefits of both a corporation and a partnership by allowing profits and losses to be passed through to the owners without taxation of the business itself, while owners are protected from personal liability.
There is no single right answer, said Mark Kalish, co-owner and vice president of EnviroTech Coating Systems, Inc. Kalish has been part of several start-ups and said, ”…very business should be evaluated individually. Each situation I’ve been involved with has been different.”
Experts agree that sound, professional advice is key to making the decision that’s best for your business. It’s not necessary to spend a lot of money as you investigate your choices. Information can be found at the Small Business Administration and the Service Corp of Retired Executives –SCORE. Or you can ask your tax advisor at Diamond & Associates CPAs for their advice and recommendations.