Know the Benefits of Choosing the Correct Tax Entity for Your Business
Many business owners often share that they are “flailing in the wind” when it comes to general business acumen and management. They feel knowledgeable in the specific trade and services they offer but are not confident in the “running of the business” and the many decisions that accompany it. One such situation recently occurred when a client asked if they should incorporate and were unsure of the importance of choosing the correct tax entity.
What are the different tax entities?
The three most common business entities for taxation are Sole Proprietor, Partnership, and S Corporation. Many business owners think having a Limited Liability Corporation (LLC) is one way to be taxed. However, a business cannot be TAXED as an LLC. An LLC is a legal entity set up through the state — where the business is doing business — to provide legal protection. If your business is an LLC, you must still choose how you want the business to be taxed. (Click here to learn more.)
Storen Business Team Saves Thousands With Proper Tax Entity Selection
Recently, a business owner came to us asking if they should incorporate (i.e. transition from a Sole Proprietorship to an S Corporation). This question was prompted by the client falling under the following categories:
- They are a service provider.
- They are a Sole Proprietor and registered with the state as a single-member LLC.
- The word has gotten out that they are very good at their trade and well-versed in the services they offer customers, i.e. their business is in a significant growth pattern.
- Despite the rapid growth, they are not confident in the general “running of their business.”
After a conversation with our Business Advisory team to consider the many factors – including net income and retirement planning – the owner confidently moved forward with the decision to file as an S Corporation. While there were some costs in doing so, the tax savings well outweighed the amount incurred due to the new tax entity. For instance, this particular business owner realized an annual tax savings greater than $12,000 for the previous tax year, which will also be recognized year after year for the life of the business. To put the impact of this change into perspective, if they remain in business for the next five years with no new growth, their overall tax savings as an S Corp could be over $60,000.
Additionally, these realized savings can be put back into the business and used to purchase a vehicle, save for retirement, pay back liabilities, or other such needs. In this instance, the business owner shared that these realized substantial savings would allow them to reinvest their profit into setting up and funding a retirement plan.
Overall, the advice to change their tax entity from a Sole Proprietorship to an S Corporation offered profound tax savings for the business owner, and they even shared that they couldn’t have done so without the guidance and education received by our Storen Financial Business and Tax Advisors.
Want to learn more? Ask about our Business Advisory Services…
Have you asked yourself, “Which tax entity should my business be?” Our Business Advisory team is thoroughly equipped with the expertise to assess your needs and provide practical advice to expand your understanding of business principles. Our ultimate mission is to guide businesses to success by creating a roadmap for how to achieve your goals.
We are happy to host an introductory meeting to learn about your pain points and goals. Contact us now and schedule a meeting today. (Click here to contact us.) Or interested in learning more about other Business Services? (Click here to learn more.)
Blog by Erika Lewis – Business Services Director
Learn more about Erika and the rest of the Storen Financial team here.
This is a hypothetical example and is not representative of any specific situation. Your results may vary. Storen Financial and LPL Financial do not provide legal advice or services. Please consult your legal advisor regarding your specific situation.