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Choosing the best entity for your business

Deciding on your type of business entity is an important decision for many reasons.  It is a complex decision due to all of the legal and financial implications it will have on your organization.

It affects your ability with which you can get a small business loan or raise money from investors. 

Another consideration, if someone sues your company, your entity structure determines your risk exposure.

The amount of taxes you have to pay can vary substantially depending on your business entity choice.  With the 2018 TCJA laws, tax strategies for businesses have drastically changed.

Additionally, state income taxes should be taken into consideration when deciding the type of entity.

There is no single “best” choice for all small businesses since there are many factors.  Some businesses are more prone to lawsuits than others.  The size of the business and amount of profit also affects the best entity.  Your other sources of income, such as wages, rental income, and social security, also affect, which is the best entity for you.  Your marriage status can also have an effect.

State governments in the United States recognize more than a dozen different business entity types, but most small business owner chooses between these six: sole proprietorship, general partnership, limited partnership (LP), limited liability company (LLC), C-corporation, and S-corporation.

Providing readers with the advantages and disadvantages of each of these entities in one article is not possible.  I will explain the advantages and disadvantages of each business entity type in future articles, and provide information on how to determine what’s best for your company. 

With the 2018 TCJA tax changes, this decision can result in a substantial amount saved in taxes.  Many businesses would benefit every year with tax savings from changing their type of business entity due to the new Qualified Business Income QBI deduction.  However, the 2018 TCJA tax laws are very complex and would require hundreds of hours to learn.  To illustrate the complexity of the tax changes, some of the new terms associated with the new QBI deduction includes Allocable Percentage for Specified Service Business, CQBI, CQBI(D), Net Tentative QBI, Phaseout, Qualified Business Property, Qualified Trade or Business and SSTB. 

The impact of the 2018 tax changes will be explained in layman’s terms that everyone can understand in future columns for each type of entity.  The legal risk from lawsuits will also be covered since this is an important consideration. 

Taking the time to get a general understanding of the benefits of each business entity is a basic knowledge every business owner should have so that you can discuss it with your advisor. 

 

David Zubler has an accounting degree and computer science degree with high distinction and has experience as an accounting manager and controller in manufacturing, and has owned his tax/consulting business since 1990.  David Zubler is the founder and president of Your Tax Care.  The company provides business and tax education to the public at its website, YourTaxCare.com.  David can also be contacted by email at zublerdavid@gmail.com.