Only taking tax issues into consideration, small businesses have a difficult decision on when to either incorporate or organize as an LLC. For tax purposes, an LLC can be a single member, treated as a sole proprietor; a partnership, the default for a multi-member LLC; and a corporation or S-corporation. Your circumstances will determine how you wish to organize your business.
Most businesses are organized as an LLC, electing for the tax treatment of choice. As a rule of thumb, a very small business with a small profit or loss should default to a single member or partnership. Once a business has earning of $50,000, an S-corporation has advantages over other forms of taxation.
Organizing your business as an entity has long reaching ramifications. The decision should not be taken lightly. It is important you have a serious conversation with your friendly local accountant on how your business is organized. Delays can add to your tax burden. With increased complexity in the tax code, a regular consultation with your tax advisor is advised.
Showing posts with label LLC. Show all posts
Showing posts with label LLC. Show all posts
Tuesday, January 19, 2010
Thursday, September 10, 2009
The Rules Are Changing
Small business owners face a challenge as the tax climate shifts. What worked for over twenty years could be invalid soon.
Let me explain. In 1986, the tax code lowered the top individual tax rate below the highest corporate tax rate. Tax dollars were saved by organizing as an S-corp. As LLCs grew in popularity, many organized as an LLC, electing S-corp treatment for tax purposes.
Tax rates are going up. Previous tax cuts will expire at the end of 2010, bringing the top individual tax rate to 39.6% from today's 35%. Additional surtaxes proposed in Congress will bring the top rate to 45% or higher. This doesn't include state income taxes, just federal.
What does this mean for small business? It means regular corporations will provide better tax savings over the S-corp for some in the near future. It also means two levels of taxation. Even though this strategy will keep taxes lower, it will still be a tax increase.
More than ever, you need to work with your tax pro. Review your tax situation with consideration for the tax changes coming. It will be interesting the next few years.
Let me explain. In 1986, the tax code lowered the top individual tax rate below the highest corporate tax rate. Tax dollars were saved by organizing as an S-corp. As LLCs grew in popularity, many organized as an LLC, electing S-corp treatment for tax purposes.
Tax rates are going up. Previous tax cuts will expire at the end of 2010, bringing the top individual tax rate to 39.6% from today's 35%. Additional surtaxes proposed in Congress will bring the top rate to 45% or higher. This doesn't include state income taxes, just federal.
What does this mean for small business? It means regular corporations will provide better tax savings over the S-corp for some in the near future. It also means two levels of taxation. Even though this strategy will keep taxes lower, it will still be a tax increase.
More than ever, you need to work with your tax pro. Review your tax situation with consideration for the tax changes coming. It will be interesting the next few years.
Tuesday, July 21, 2009
Writers Overpay On Taxes--Part II
Yesterday I talked about reducing taxes for writers earning less than $30,000. Today I will discuss a tax reducing strategy for writers, any business for that matter, with profits into the six figures.
There is a reason accountants and attorneys love LLCs. They were created with service businesses in mind. The beauty of the LLC is with how taxes are handled. An LLC can be treated as a sole proprietor (single member), partnership, corporation, or S-corporation with a simple form submitted to the IRS, Form 8832, sometimes call check-in-the-box. You default to a single member LLC with one member and a partnership (LLP) if there are multiple members.
Once your profits rise to $30,000 and up, it usually makes sense to elect to be treated as an S corporation. Once you elect as an S corp, you are an employee of the company with all required payroll and payroll taxes required. However, what you get paid by the company is determined by you. As long as it is reasonable, a fluid term used by the IRS and the tax court on this matter, it is acceptable. All remaining profit flows to your personal income tax return as ordinary income without FICA or self employment taxes. Taxes saved can exceed $10,000 per year. The goal is to have the lowest reasonable wage allowed.
Always check with a tax professional before taking any action. Your personal situation determines how well any tax strategy works.
There is a reason accountants and attorneys love LLCs. They were created with service businesses in mind. The beauty of the LLC is with how taxes are handled. An LLC can be treated as a sole proprietor (single member), partnership, corporation, or S-corporation with a simple form submitted to the IRS, Form 8832, sometimes call check-in-the-box. You default to a single member LLC with one member and a partnership (LLP) if there are multiple members.
Once your profits rise to $30,000 and up, it usually makes sense to elect to be treated as an S corporation. Once you elect as an S corp, you are an employee of the company with all required payroll and payroll taxes required. However, what you get paid by the company is determined by you. As long as it is reasonable, a fluid term used by the IRS and the tax court on this matter, it is acceptable. All remaining profit flows to your personal income tax return as ordinary income without FICA or self employment taxes. Taxes saved can exceed $10,000 per year. The goal is to have the lowest reasonable wage allowed.
Always check with a tax professional before taking any action. Your personal situation determines how well any tax strategy works.
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