Small Business planning and structuring is very important to both asset protection and reducing your tax burden. Getting your structure setup correctly from the start will save you money and help avoid potential headaches down the road.
The most import thing you’ll want to consider is how to setup the main business entity. The main business types that small business owners choose are: Sole Proprietor, Partnership, Limited Liability Company (LLC) or S-Corp.
While LLCs provide some level of legal protection, S-Corp provides both legal and tax planning benefits so unless you have a very compelling reason to do otherwise, those 2 are the most popular ones to consider and we’ll briefly discuss why those are the most popular ways to setup your business structure. We won’t discuss the C-Corp as that’s typically the structure chosen by larger businesses and isn’t the structure that most small businesses would use. Should your business grow in size to where that would be a better fit, your advisors would recommend that at the appropriate time
While certainly a bit simpler than the others, the Sole Proprietorship offers no tax planning or legal benefits but it’s the easiest to setup and provides a basic structure for obtaining bank accounts and tax id numbers to enable you to get started. You will be required to pay self-employment tax on all business income generated with this type of entity.
The LLC is the structure that many choose to create a more organized business structure and for legal liability protection that a properly designed LLC structure may provide. However, many wrongly believe that an LLC provides tax benefits. Unless you declare the LLC should be taxed as an S-Corp, you must pay self-employment tax just as with the Sole Proprietorship and Partnership business entities.
The Subchapter-S or S-Corp, provides both legal liability and tax planning benefits and is often the best structure for most small businesses that earn or plan to earn at least $35,000 per year. The benefits increase as revenue grows. Self-employment tax is minimized by having the ability to take only part of the business profit in salary while the other passes through on the K-1. This allows you save significantly on taxes so that you can reinvest in your business or add more money to your retirement account.
There are too many benefits to go deep in this discussion but another area to research for yourself is how to best save for retirement. An S-Corp can be a great structure from which to fund your Solo-401k or other qualified retirement plan. Talk to your advisor about what’s best for you.
As you business grows and prospers, you may want to diversify into other ventures and opportunities, another benefit of the S-Corp is that it can hold those new business entities too, thus simplifying your business structure as you grow and create other businesses and business ventures such as real estate holdings. Many people place their real estate holdings in an LLC structure but as we discussed, there are no tax benefits for doing this but we probably don’t want to put all of our different business ventures in a single structure. So you might wonder, what’s the best way to structure you businesses as you grow and want to continue to add new things? It all comes down to properly structuring your business from the start. For example, you might create an S-Corp from the start to operate your first or primary business, then for each separate unrelated entity, you might create an LLC, say one for Real Estate that you own investment properties that generate rental income, another LLC to hold your fix and flip properties, an LLC to hold each other new business venture you start or maybe share ownership with one or more partners, etc. You just have to spell out the specifics in your operating agreement for each LLC that all or some fractional part is owned by your S-Corp. All income that is attributed from the various LLC entities to you would flow into the single S-Corp and would distributed to you by the S-Corp as salary or profit from there.
Now to be clear, I’m entrepreneur and software professional, I’m not an accountant or a lawyer and I’m not an expert at these topics, just a small business owner that knows what works for me and tries to keep up with the latest information to operate my own businesses effectively and pass useful information on to others that may them to help avoid making the mistakes that so many of us make when starting or running a business. The purpose of the article is to point you in the right direction and give you some ideas to research on your own, this should not be take as legal or financial advice and anything you are considering should be discussed with your own tax and legal advisors that know your individual situation.
If you’re just getting started or looking for a good source of information, one of my favorite people to follow on this topic is Mark J Kohler, he’s both an Attorney and CPA and his company specializes in helping small businesses. He’s also a best selling author, and he’s got a ton of resources on his website to explain these concepts in detail, and he provides individualized consulting to help you get all of these things done right from the beginning. Whether you are looking for ideas or someone to help you on these matters, Mark Kohler is an excellent resource and great place to start.
