The article is in the business section of the 17 January 2011 issue of the Inland Valley Daily Bulletin.
BUSINESS ENTITY CHOICES:
DECIPHERING THE ALPHABET SOUP (C,S, OR LLC?)
From an individual business owner, to future owners who are just beginning to develop their dream, it is important to understand the different entity classifications, and the tax implications they have on businesses. For instance, there are "C" corporations, "S" corporations, and LLC's. Do you know which one would best fit your business situation?
To better understand these different choices, it is best to break it down into two questions. The first question is regarding the legal classification of your business. Most businesses choose between incorporating, or becoming a Limited Liability Company (LLC). I recommend consultation with your attorney regarding the legal protection issues that each provide. In most cases, the LLC can accomplish many of the same protections as a traditional corporation. Where they differ, are in the tax classifications.
If you decide to become an LLC, you will be faced with the second question - How do you want to be taxed? If you are in business for yourself, you have three options. You can be taxed as a traditional corporation, a subchapter S corporation, or a disregarded entity (which simply means that you will continue reporting all your income on your personal return through the Schedule C). If your business has multiple owners, and you choose to become an LLC, you can be taxed as a partnership, a traditional corporation, or a subchapter S corporation.
S corporations have gained popularity over the years because of certain tax advantages they enjoy. According to IRS figures, S corporation tax filings have increased from 2.15 million in 1995, to 4.44 million in 2008. In fact, over fifty percent of all corporation returns filed are S corporations. The tax benefits of an S corporation stem from the fact that it is a flow-through entity, meaning that most items of income and expense, flow down from the corporate level to the individual return. This avoids the double taxation that takes place in C corporations where profits are taxed by the corporation, then passed on to shareholders as dividends, which are taxed again.
I recommend business owners, as well as prospective business owners, consult with an Enrolled Agent or other accounting/tax professional, in addition to legal counsel, regarding the benefits of having the proper corporate entity structure in place. Remember, not all businesses are the same. Some companies are more suited for S corporations than others. However, restrictions will prohibit some companies from becoming S corporations. The bottom line is that the proper entity choice can save you thousands of dollars in taxes, and like most things in life, planning is essential.
Danny Houck, Enrolled Agent
Danny Houck, EA is the CEO of Alta Loma Tax & Accounting, LLC in Rancho Cucamonga
