As your business evolves you have to consider the best structure for legal protection and for optimal tax savings. Legal structures are defined by States, tax structures are defined by the IRS. Your business can choose a different tax to legal structure.
Business Structure Comparison
| Business Structure | Ownership | Liability | Taxes | Tax Election Strategy |
|---|---|---|---|---|
| Sole proprietorship | One person | Unlimited personal liability | •Must file schedule C •Self-employment tax | Use when net profits ~$40-$75k or less Depending on situation |
| Partnerships (GP, LP, LLP) | Two or more people | Unlimited personal liability unless structured as a limited partnership | •Pass-through •Self-employment tax (except for limited partners) |
Use when net profits ~$40-$75k or less per owner depending on situation |
| Limited liability company (LLC) | One or more people | Owners are not personally liable | •Pass-through •Self-employment tax •Can elect S-Corp or C-Corp tax status |
Will need to elect partnership or Corp status |
| Corporation – S Corp | One or more people, but no more than 100, and all must be U.S. citizens | Owners are not personally liable | •Pass-through •Self employment tax |
Use when net profit $75k – $250k combined with a “reasonable salary” owner salary |
| Corporation – C Corp | One or more people | Owners are not personally liable | •Corporate tax •Subject to double taxation •Can elect S-Corp if >100 members |
Subject to double taxation, but you do not have to distribute earnings |
Keep in mind that there are costs associated with each legal structure for setup and annual filing fees which vary depending on the state filed, possible attorney fees for consult or completion if you can’t do it yourself, and certainly a CPA for tax filing and to maintain your books. But once your business grows these are necessary costs.
Schedule a consultation if you want to discuss further
