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Business Structure & Entity Consulting

Business structure

One of the most important decisions entrepreneurs face is selecting what type of entity should be utilized for their new business venture. A business entity is created for an organization’s tax and legal purposes. Whether you choose to be a Corporation, an S-Corporation, a Partnership, a Limited Liability Company or a Sole Proprietorship, your choice will have tax and business implications. All too often business owners set themselves up in business and don’t fully understand the implications of this selection until they begin facing challenges. There are subtle nuances between entities, and in some cases, a company may be able to take advantage of more than one business structure. That’s why it can be extremely advantageous to hire a business structure consultant for advice before you decide how to set up your business.

Get the Help You Need with Choosing Your Business Structure:

The business structure you select will not only determines who will be taxed and how, but it also determines liability and recordkeeping. The establishment and taxation of business entities varies by state. These are the different types of structures to keep in mind when deciding how to set up your organization:

  • Sole Proprietorship -- A sole proprietorship is the simplest type of business entity. There is just one owner of the company, and the owner is solely responsible for all of its assets and liabilities. This entity is easy to establish and requires minimal record-keeping.
  • Limited Liability Company (LLC) -- Limited Liability Companies can have multiple owners or “members”. Members of the LLC can report profits and losses in their personal taxes, however, members of the LLC are generally not personally responsible for debt incurred by the LLC. Setting up your business as an LLC can sometimes require less recordkeeping than a corporation, but more than a sole proprietorship. It also offers a lot of flexibility as far as taxation.
  • Corporation -- The structure of a Corporation is best for large organizations with multiple employees. The Corporation is an independent legal entity owned by its shareholders, and it requires extensive recordkeeping. The shareholders’ personal assets (besides stock in the company) are protected from company debt. Corporations have the advantage of raising capital through stock, and personal and corporate tax responsibilities are completely separate. The pitfall of a corporation is a double taxation.
  • S Corporation -- To become an S Corporation, you must first be a corporation or an LLC. The S Corporation is an entity that is only designated by the IRS, and it was created for tax purposes only. The S Corporation structure allows profits and losses to pass through a personal tax return, and double taxation between the shareholders and the corporation is avoided. The S Corporation structure is also a great option for a small company, but more record-keeping is required than is necessary with a Sole Proprietorship or LLC.
  • Partnership -- A partnership is a business entity with more than one owner or partner. There are three common types of partnerships: General Partnerships, Limited Partnerships and Joint Ventures. A partnership is fairly easy to form and may have the added advantage of sharing resources to create capital. However, partners are personally liable for business debt, just as the owner of a sole proprietorship.

Choice of Entity - Tax Implications

 
Sole Proprietorship
Disregarded LLC
"S" Corporation
Limited Liability Company
"C" Corporation
 Filed on IRS Form:
Schedule C
Sch C, E, F
1120S
1065
1120
 Net Earnings Example:
$100,000
$100,000
$100,000
$30k / $xxk
$100,000
$30k
Guaranteed Pmt
$100,000
 FICA TAX (15.3%)
$15,300
$15,300
$4,590
$4,590
$15,300
 Federal Income Tax
Net Earnings @ Personal
Income Tax Rate
Net Earnings @ Personal
Income Tax Rate
Net Earnings @ Personal
Income Tax Rate
Net Earnings @ Personal
Income Tax Rate
DOUBLE
 Franchise Tax
 -Assessed Once Gross
 -Receipts Exceed $1 Million
No
Yes
Yes
Yes
Yes
 Home Office Deduction
Yes
Yes
No
Yes
 
 Legal Protection Provided
 -by Entity Structure **
None **
Better **
Good **
Better **
 
 Flexibility re: Capital Distributions
N/A
Yes
Little
Yes
 
 Basis Created by Debt of Non-Owner
N/A
Yes
No
Yes
 
 Annual Board Meetings & Minutes Required
N/A
No
Yes
No
 
 Commingling of Funds
Allowed
Not Allowed
Not Allowed
Not Allowed
 
 Affect on Social Security Benefits
Not Affected
Not Affected
Less
Less
 
 1040es Payments (Qtly) Required?
Yes
Yes
Yes
Yes
 

**This analysis is provided to represent the tax implications regarding entity type and is intended to provide general information. While Chandler & Knowles CPAs, PLLC, always makes every effort to offer accurate information, errors may very well occur due to the nature of the subject matter and our interpretation of any laws and regulations involved. We provide this information "as is." The information presented should not be construed as legal, tax or accounting advice. You should consult with our office or other professional advisors familiar with your situation for advice concerning specific tax or other matters before making any decision.

Speak with a Professional CPA Today

Contact us by filling out our form or calling 817-430-3000, or visit either of our locations in Flower Mound and Addison, TX. Let one of our professional business structure consultants at Chandler & Knowles CPAs help guide you through this process so that your business benefits from its structure and maximizes its profits.

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