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Many factors are involved when choosing a business entity

1/20/2022

Whenever there’s talk of tax reform, it’s a good time to look at your current business entity structure. Or, if you’re starting a new business, it’s wise to take possible changes into account when making your decision. 415 Group Partner Chad Isler, CPA, MT, explains the importance of aligning the structure of your business with your goals.

By
CPA, MT

When choosing a business entity, there are two primary directions you can go – a C corporation or a pass-through entity. There are a variety of tax and non-tax related factors that go into selecting the business entity that works best for you. Some of these considerations include the expected use of future profits, whether there is debt on the balance sheet, and differences in available tax rates and deductions at the corporate level versus at the individual level. However, when tax reform is on the horizon or changes have recently been enacted, the tax-related factors inevitably come to the forefront.

It’s important to build a strong relationship with a trusted advisor to help navigate these issues. The value a CPA can provide is derived from building a history of knowledge related to understanding your business, future goals, and family dynamics. They will be able to link this knowledge with how proposed or enacted tax law changes should be used to provide the most tax-efficient structure for your business. Your accounting team—whether internal or external—should be proactive in looking for ways to help your business. They should assess possible changes and their potential effects on your business. These efforts will help guide you toward a change or the security in knowing that proceeding forward under the current structure is best.

Changing your tax structure is typically a multi-year commitment. However, circumstances that led to the original decision can and will change over time, so it is important to consistently monitor your options as your business and tax laws evolve. If you’re interested in assessing your business structure and the considerations related to possible tax reform, reach out to us at 415 Group today.

Are you planning to launch a business or thinking about changing your business entity? If so, you need to determine which entity will work best for you — a C corporation or a pass-through entity such as a sole-proprietorship, partnership, limited liability company (LLC) or S corporation. There are many factors to consider and proposed federal tax law changes being considered by Congress may affect your decision.

The corporate federal income tax is currently imposed at a flat 21% rate, while the current individual federal income tax rates begin at 10% and go up to 37%. The difference in rates can be mitigated by the qualified business income (QBI) deduction that’s available to eligible pass-through entity owners that are individuals, estates and trusts.

Note that noncorporate taxpayers with modified adjusted gross income above certain levels are subject to an additional 3.8% tax on net investment income.

Organizing a business as a C corporation instead of as a pass-through entity can reduce the current federal income tax on the business’s income. The corporation can still pay reasonable compensation to the shareholders and pay interest on loans from the shareholders. That income will be taxed at higher individual rates, but the overall rate on the corporation’s income can be lower than if the business was operated as a pass-through entity.

Other considerations

Other tax-related factors should also be considered. For example:

These are only some of the many factors involved in operating a business as a certain type of entity. For details about how to proceed in your situation, consult with us.

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