WHAT ARE THE TYPES OF ENTITIES

Super EXCITED right now.  Just completed an interview today with Cindy Ashton at Speaker Stardom to support her peeps on creating a solid organized financial foundation.

I went through six of the seven steps of the "How to Be Your Own CFO" 
(Click on the above link to grab your own copy.)

I thought why not share it with those who want to start a business, or who are currently in business  and want to create a solid organized finanacial foundation and gain a CFO's perspective to learn what you need to support a thriving business.

Ready, for creating a solid organized financial foundation?

Step #1  Create an entity:

So What are the types of business entities?

There is no one perfect choice for any business. You must determine which of the options best fits both your current needs and your business plans. Some of the things you’ll consider include:

• The cost and complexity of creating and maintaining the business structures
• Your current income tax situation
• The potential risks and liabilities of your Business
• Your investment needs and income projections

The different business structures include:
• Sole proprietorship
• General Partnership
• Limited Partnership
• Limited liability company (LLC)
• S-Corporation
• C-Corporation

I will provide information on the three highlighted in red since I have personal experience with the three. 

The Sole proprietorship is the most common form of structure in the US for one-person businesses. You don't have to register with the state, pay annual state fees, nor do anything else special other than obtain the required business licenses. You are the business; and while this generally makes paperwork much easier to do, remember that you may end up paying more in taxes with this default option, and you'll be personally liable for all business debts and obligations.

The pros - it's easy and simple, you just need a business license, and of course a separate bank account and business credit card.

The con's - You may end up paying more in taxes and you'll be personally liable for all business debts and obligations.

Limited Liability Companies (LLCs) were a gift to small businesses. Not only are they less formal structures than corporations to manage, they provide their shareholders with the liability protection of corporations and the flexibility of deciding how the business will be taxed.

By default, a single member LLC will be taxed as a sole proprietor and a multi-member LLC as a partnership: the profits or losses will flow through directly to the members. However, you can elect to have an LLC taxed like a Corporation, either C or S. With these tax elections, you get all the benefits of being taxed as a corporation together with the greater simplicity of managing a less formal structure.

Although an LLC does not require the same formal paperwork as a corporation, bear in mind that the liability protection of the company is based upon the fact that it is an entity separate from its owners. To prove that this is the case, the company must be run professionally. All professional organizations document decisions; so don't forget the paperwork altogether.

The pros - LLC's provide their shareholders with the liability protection of corporations.

The con's - Single member LLC's will be taxed as a sole proprietor and a multi-member LLC as a partnership: the profits or losses will flow through directly to the members.

Corporations (S Corp and C Corp) Unlike partnerships and sole proprietorships, corporations are independent legal and tax entities. From both a legal and tax perspective, the company is completely separate from the people who own, control, and manage the company.
The primary difference between an S-corp and a C-corp is how the profit or loss of the corporation is handled.
The C-corporation pays income taxes in its own right. Shareholders of the C-corp pay taxes only on what they take out of the corporation in the form of salaries, bonuses or dividends. The S-corporation, on the other hand, may pay some state and local tax in its own right, but it is primarily a pass through entity, passing the net income or loss to the individual shareholders/owners, who report it on their personal taxes.
A C-corporation exists only in law. Like an individual, it can incur debt, own property, sue and be sued. It files taxes as a separate entity (like an individual) and continues its existence despite changes in ownership or management.
Perhaps the best aspects of a C-corporation are the large number of tax deductions that can be taken and the range of benefits that can be offered..

There are only three ways to get money out of a C-corporation prior to dissolution:
1. as W2 wages;

2. as a dividend, which is a distribution of profit which has been taxed at the corporate level, then is taxed again at the individual level;

3. as a loan, preferably to another entity that will use the money for other investments.

An S-Corporation is a legal entity that is designed for small businesses, where the owners typically need most of the money earned to pay for living expenses. The IRS allows the shareholders of an S-corp to take money out of the corporation two ways:

- as W2 wages, with the attendant payroll and income taxes;
- as a distribution, with attendant income taxes only. No payroll or self-employment tax is owed on this money

The pros - An S corporation, or S corp, lets you avoid self-employment taxes or equivalent payroll taxes on some of the profits you take out of the business.  Often times, in fact, an S corporation saves a business owner thousands of dollars a year in self-employment or payroll taxes. 

The cons - There are restrictions on how distributions are split among shareholders; and unlike C-corporations, there are severe restrictions on who can hold the shares of an S-corp.

Should I form an LLC (Company) or Corporation?

Let’s assume that you’ve decided limiting your personal liability and saving money on taxes is a good idea. Now, you have two main choices – form a Corporation, which is the more familiar approach, or try out the new streamlined Limited Liability Company (LLC). Which do you choose?
Like anything, there’s no one "right" choice. However, there are a few guidelines you can follow.

When an LLC might be a better choice

The LLC is simple and flexible, and therefore makes the better choice for most small businesses. It also combines the liability protection of a corporation with the flexibility of deciding your tax election. This is especially useful if your business will hold real estate that is increasing in value. You certainly want the liability protection in case you are sued by a tenant. However, in a C-corporation, when the property is sold the gain will be taxed as ordinary income at the prevailing tax rate for the corporation. If the gain is significant, this rate can be quite high. Moreover, if the gain is distributed to the shareholders in the form of a dividend, the proceeds will be taxed again at the individual level. In an LLC taxed as a partnership or sole proprietorship, the gain will flow down to the members as passive income to be taxed as long term capital gains without payroll or self-employment tax or double taxation.

This is just a brief overview of a few choices.  I recommend you have many a conversation with your CPA, or contact Legal Zoom to ask questions to help you understand which entity will be right for you and your business.

The more time you spend on research and learning, the more informed you will be.  Repetition, repetition, repetition is my motto and it's how we learn and absorb new information.  Ask plenty of questions and do not take any answer for granted.

Another great resource for you to learn about entities is:

Lower Your Taxes Big Time 2013/2014

Questions??? Reach out to me at d.rosenfelt@cfomadeeasy.com.

Warmly -

Debbie Rosenfelt

Chief Heart Officer