Posts by Gene Spittle, CPA, PFS:
Are you an entrepreneur who wants to take advantage of the benefits often awarded to small-to-midsize business owners? If so, you may want to consider establishing a limited liability company or an S-corporation. Both options offer several distinct advantages depending on the size and scope of your business and it’s even possible to combine the two – potentially providing you with the best options of both worlds.
Keep in mind that in some circumstances, making the change to an LLC may simply be impractical. Given your particular situation, the switch may have unfavorable consequences. Consider working with a knowledgeable financial advisor and/or business consultant who can assist you with proper planning and who can articulate the advantages and disadvantages of each option. If you are ready for a structure change, be sure to look closely at your short and long term goals and objectives – and be sure to build in some flexibility so that your business can adapt as it matures.
While it may be nearly impossible to find a perfect fit with regard to your specific needs, you may find one option to be better than another when working toward accomplishing your unique financial and tax goals. Read on to learn more about a few organizational structures that might make sense for you.
Want A Better Business? Structure Matters – Created with Haiku Deck, presentation software that inspires
Just Passing Through
Regardless of whether you establish an LLC or an S-corp, you will receive the benefits associated with owning a pass through entity, meaning that your company’s income will pass directly through to the business owners – potentially receiving better tax treatment. Furthermore, both options grant owners with some form of limited liability protection.
What To Expect From Your LLC
If you decide to structure your business as an LLC you will likely enjoy the tax efficiencies and operation flexibility this traditional sole proprietorship or general partnership will provide. If you plan to enter into a partnership, each owner will be considered members and will report their portion of the profits and losses to the internal revenue service (IRS) on their personal federal income tax return. Another great benefit LLC members report is the ease of their operation and administration responsibilities. Members also enjoy fewer restrictions when the time comes to distribute earnings through profit-sharing.
Be aware, however, that the liability protection provided by an LLC is typically limited to each member’s personal investment in the company.
What To Expect From Your S-Corp
Corporate income, losses, deductions and credits are passed directly through to owners (or shareholders) of S-corporations. Shareholders of the company are then expected to report the business’s income and losses on their federal tax returns – similar to an LLC. Keep in mind that S-Corps may have no more than 100 shareholders. Furthermore, partnerships, corporations and non-resident aliens are not eligible to own S-corps. Shareholders only consist of individuals and certain trusts and estates.
Perhaps the biggest argument for establishing your business as an S-Corp is the minimal tax liability it provides to shareholders and to the business as a whole. Only the wages paid to owners and employees are considered earned income and subject to Federal Insurance Contributions Act (FICA) tax for Social Security and Medicare. Other net earnings passing through to shareholders are considered “passive income,” protecting them from the taxes that would otherwise be assessed per the Self Employed Contributions Act (SECA) tax.
But be forewarned, even though S-Corps have some great tax benefits, they also have complex administrative and recordkeeping obligations. All S-Corps are required to maintain formal minutes, bylaws, forms and filings. Additionally, because shareholders earnings are limited to a proportional percentage of capital contributions, profit sharing is difficult to establish. In other words, if you are looking for a relatively low-maintenance option – you may not want to choose to establish an S-Corp.
The Best Of Both Worlds
Wouldn’t it be great if you could structure your business in a way that allows you to enjoy the benefits of minimal tax liability, profit sharing, and fewer administrative and operational responsibilities while curtailing the restrictions posed by establishing the company solely as an LLC or S-Corp? Good news – that option exists!
There are steps you can take to establish your business as an LLC while allowing it to receive the tax treatment of an S-Corp – it just requires you to seek insight from a professional in business and financial matters and a special election with the IRS via Form 2583.
The decisions you make today will impact the future of your business for years to come. Email Rea & Associates to learn more about the pros and cons of LLCs and S-Corps, as well as other options that may be available to address your specific challenges.
By Gene Spittle, CPA, PFS, CGMA (Wooster office)
Being a manufacturer in today’s economy has it opportunities and challenges, and right now you may be flying high on business and running low on people to actually do the work. You may scratch your head daily over this issue and wonder how you can attract the right individuals to do the jobs. Let’s start with the root of the problem—perception. And then I’ll share how some manufacturers are combating this perception. Read the rest of this entry “
When was the last time you talked about taking your business to the next level? If you’ve had this discussion recently, what changes or improvements did you decide on? Were you only thinking about growing your sales? Or did you think about improving your systems and processes? How about your people – do you need to take them to the next level, too?
Making It to the Next Level
In my 31-plus years with this firm, I watched many clients grow from small mom & pop businesses to major employers in their communities. Until the past few years, I really didn’t think much about why some grew and others, well, didn’t.
Many of us learned two fundamentals in college – or in the classroom of life: In order to grow, a business needs solid leadership. And business owners needed to surround themselves with good people.
As I build our firm’s manufacturing client services team I have spent a lot of time reading, listening and asking questions about this idea of the next level. What I have found in my research is that not only do businesses need good people to grow, but you need great systems and you need to stay focused. Read the rest of this entry “
After the ups and downs of the last few years, we should all know that, when it comes to the economy, anything is possible. Some businesses vanished during this downturn, others survived – and some actually flourished! Those that survived and those that flourished had one thing that others did not: an understanding of their product cost. While many of our clients are seeing their sales volumes return to pre-2008 levels, I wonder how many of them truly know what it costs to produce their products. Read the rest of this entry “
According to a report by Ball State University’s Center for Business and Economic Research, Ohio is one of only two states in the country to earn an A in manufacturing and logistics. And the Center predicts manufacturing to hit all-time highs in 2011 and 2012. Read the rest of this entry “
Consumers are depending more and more on mobile devices – so it may make sense to use this technology in your promotional strategy. Read the rest of this entry “
When you start a small business, the most popular organizational forms are the limited liability company (LLC) and the S corporation. There are advantages to both, and you can even combine their features. Here’s what to consider: Read the rest of this entry “