One of the smartest moves you can make as an entrepreneur is to structure your business as a limited liability company (LLC) or an S Corporation. You're probably aware that both LLCs and corporations can protect your personal assets from debts and lawsuits incurred by your business, but they also offer other key benefits that you might not know about.
Indeed, these entities blend certain positive aspects of a sole proprietorship, partnership, and corporation, without some of the drawbacks of such organizations. What's more, the Tax Cuts and Jobs Act (TCJA), offers many LLCs and S Corps an entirely new tax-savings deduction, which when combined with the other benefits, make them among the most advantageous entities for today's small businesses.
Laws governing LLCs and S Corps vary by state, but in general, they offer 3 major benefits:
1. Enhanced Credibility
When it comes to owning a business, one of your most valuable assets is your brand's reputation and credibility. And if you're a startup, structuring as an LLC or S Corp adds instant legitimacy and credibility to your company's image.
Whether it's potential customers, vendors, or employees, people are more likely to do business with LLCs and corporations because it shows you take your operation seriously. Even the IRS takes these entities more seriously: LLCs that are taxed as an S Corp (and therefore file their own tax return) are nearly 10 times less likely to be audited than sole proprietorships.
2. Liability Protection
Unlike sole proprietorships and general partnerships, LLCs and S Corps protect your personal assets if your business is ever sued or falls into serious debt. For example, if your company is structured as an LLC or S Corp and it fails, creditors can't come after personal assets like your retirement savings or home, unless you've signed a personal guarantee to secure any debts.
Both LLCs and S Corps effectively create a barrier between you and the activities of your business. Creditors, clients, and other potentially litigious entities can go after your business assets, but not your personal assets. You can be held personally liable in certain cases, such as if the LLC or S-Corp isn't maintained properly, but with our trusted legal guidance, staying on top of the required corporate formalities is a snap.
3. Tax savings
As an LLC, you have flexibility in choosing how you'll be taxed. Unless you choose to be taxed as an S corporation, single-member LLCs are automatically taxed as sole proprietorships, while multi-member LLCs are taxed as partnerships. In such cases, your company doesn't pay any taxes.
Instead, your share of the net business income is taxed on your personal tax return, and you'll pay taxes based on your personal income tax rate. But in doing so, you'll lose some of the other benefits, like being less likely to be audited by the IRS.
Similarly, with an S Corp, no income tax is applied at the corporate level. The corporation must file its own corporate tax return and determine its taxable income, but this income is divided and distributed among its owners/shareholders. Each owner then includes his or her portion of the corporate income on their personal tax return. The IRS considers both LLCs and S corps “pass-through” entities, since the business profit passes through the company to the owners and is taxed on their personal returns.
You can also elect for your LLC to be taxed as an S-corporation. If so, you'll be responsible for paying payroll and payroll taxes, as well as filing a tax return on behalf of the corporation. As long as you pay yourself a reasonable salary, you only pay payroll taxes on the amount of your payroll, not on your profit distributions from the company.
You'll still pay income tax on your profit distributions, but you can save roughly 15% on payroll taxes. As an LLC, you should earn at least $75,000 of net income annually for the S-Corp election to make sense, so if you're close to that, contact us to discuss your options.
Thanks to the TCJA, LLCs and S Corps now come with a new tax benefit. Starting in 2018, these entities can qualify for a straight 20% deduction on “qualified business income” (QBI). This means some LLCs and S Corps will only be taxed on 80% of their pass-through income. However, the deduction is subject to several limitations, and not all companies will qualify, so meet with us to see if you can take advantage of this new provision.
Reap the benefits
Whether you're about to launch a new company or are currently doing business as a sole proprietorship or partnership, you should seriously consider becoming an LLC or S Corporation. Not only do these business structures protect you from personal liability, but they also offer incredible advantages unavailable to other entities. Meet with us today to learn more about how LLCs and S Corps can maximize your company's success.
We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.