Soooo, have you taken the big jump yet? If you have, congratulations. For those of you still sitting on the fence contemplating the prospect of starting your own business, I hope my information will ease your fear and give you the push you need moving forward.
In our first article, we discussed the importance of establishing an entity for your new business, the different types of entities, and the importance of having liability and Fault and Negligence Insurance.
In this article we will discuss the various ways that your entity can be taxed.
C-COMPANY
We will start with C-Corporation. C-Corporation is the only entity separate from its owner. It files a separate federal income tax return. Being able to take advantage of any available tax deductions. As an example; Salary paid to employees, Bonus, Education, 100% for Medical, Dental and Disability Benefits, just to name a few. Assign 401K. The tax bracket for a C-Corporation starts at 15% for the first $50,000 of income and slowly increases to around 39%. You can finish your fiscal year at the end of any month. You can save on taxes using “Revenue Sharing”. I’ll give you an example. You can take a portion of your personal taxable income right before the end of your calendar year on December 31 and pay a hefty marketing fee or other fee. Then at the start of the new year your company can pay it back to you. A C-Corporation can deduct all kinds of fees that are not available to an S-Corp, or LLC. C-Corporations can have foreign owners and investors. A C-Corporation can sustain profits of up to $250,000.00 or more for good reasons, say for inventory, payroll, or for marketing, thereby saving tax dollars because they are taxed at a lower rate than personal income tax. It can issue different classes of shares for the purpose of raising capital for expansion. As far as double taxation, if you’re a small company there are various ways to reduce money from the business so it’s not a problem. C-corporations have Officers, Directors, Vice Presidents, Treasurers, Secretaries. All states require that you hold a meeting.
S-COMPANY
S-Corporations flow through the entity which means that all income derived from the business goes towards your personal income tax. If this is your sole business, you will earn a salary and that salary is subject to a 15.3% self-employment tax. The remainder is considered profit and is not subject to self-employment tax. If you have another job because it is a flow through the entity it will probably put you into a higher income tax bracket. Shareholders are required to pay income tax on their share of the company’s income whether they take money from the company or leave it.
You cannot have more than 100 shareholders. A C-Corporation or LLC cannot be the owner of an S-Corporation, only individuals. No foreign owners. Shareholders are required to pay income tax on their share of the corporation’s income whether they take money out of the business or leave it. Profits and losses are allocated only in proportion to each shareholder’s interest in the business. You have the ability to switch to C-Corporation if S-Corporation doesn’t work for you. However, once you do, you can’t change it back for 5 years, and your calendar year will always be December 31st. You do not have the benefit of all the same medical, insurance, etc. deductions offered by C- Corporation.
LLC
LLCs were introduced in the last 30 years. An LLC can be an Individual, Partnership, Trust, Plantation, Limited Partnership or other business entity. The LLC flows through the entity which means that the income earned from the business flows through the company directly into your personal income taxes. It does not file a separate federal income tax return like a C-Corporation. If it is a 1 member LLC, it is taxed as a sole proprietorship, and is considered a neglected entity by the IRS.
It’s not as strict as C-Corporation regarding formalities, but you should still keep track of your meetings, minutes and resolutions. This will help protect your personal assets if someone tries to suggest that you are intentionally defrauding. You also need to have an Operating Agreement between partners if you have one.
LLCs are great for real estate. Also if there is more than 1 member, they have what is called “Charging Order Protection”. The value of this is that if you or your spouse are sued personally, the collection order will only affect the individual being sued. Not an LLC, and not another partner, so you don’t have to worry suddenly about having someone else as your partner.
It can be taxed in a number of 4 different ways to be precise. Sole Owner, Partnership, C-Corp, S-Corp. The advantage of being an LLC and choosing say C-Corp tax status is that you get filling order protection and you can deposit funds in the LLC.
Each member of the LLC must pay taxes on their entire distributive share each year, even if the LLC decides not to distribute the money or any part thereof to its members.
With an LLC you can only deduct a portion of Social Security health insurance premiums and health care paid on all profits up to $102,000 for 2008. Remember you are considered self-employed not an employee of the LLC and not receiving such a salary is subject to withholding tax. LLCs are managed by the members/owners.
PROFESSIONAL COMPANY
A professional corporation is a designation for anyone who primarily carries a professional license. They cannot own a regular corporation because of the responsibilities associated with that profession. Example, Doctors, Physical Therapists, Dentists, Lawyers, Engineers, etc. Professional corporations are subject to a 35% flat tax. Professional Corporations can deposit up to $150,000.00.