On behalf of James Daily of Daily Law Group on March 14, 2023

When you start a business, you typically find a niche opportunity with a void you can fill. However, a concept is merely the tip of that proverbial iceberg; there are countless things you must consider as you establish your entity.

With various options available for structuring your business, how do you decide which one is best for you? And what tax benefits could you reap from each?

Tax implications of three different business structures

While there are many factors to consider in when choosing an entity, tax issues should be high on your list. Your tax liability will vary based on your decision.

Many entrepreneurs weigh their options between forming a limited liability company (LLC) or a corporation. But, there are other options as well. Consider how your business would thrive under the following formations:

• LLC: With an LLC, you can choose the way you pay taxes – whether as a corporation or as a pass-through entity.
• S Corporation: If you form a “pass-through” S Corp, you will not pay corporate taxes. However, you and your shareholders will be individually responsible for your share of earnings.
• C Corporation: Taxed on both the corporate and personal level, a C Corp allows the most flexibility with tax deductions. And a legal separation between you and your business leaves your company with an initial 15% tax liability on annual earnings less than $50,000.

Tax reform benefits for small businesses

Two years ago, the tax reform law was passed, and a number of small businesses were able to take advantage of the changes. A 20% deduction for pass-through entities is possible if your joint taxable income falls below $315,000 or if you file income less than $157,500 as a single.

Unfortunately, those whose income is generated by providing professional services on an individual basis may be ineligible. Professionals who fall into this category include:

• Consultants
• Accountants
• Doctors

Meanwhile, the current 21% C Corp flat rate can significantly decrease the amount you owe the government, compared to the previous rate, which, based on earnings, could jump as high as 35%.