The entity choice for a business represents the first major decision a business owner faces when starting his entrepreneurial journey. Accounting firms know the difference between a sole proprietorship, partnership, S corporation, C corporation and an LLC. The tried-and-true advice firms provide about these entities may change since tax reform is on the table in Congress and at the White House.
As of 2017, both President Trump and Republicans in Congress discussed tax reform and lowering business taxes. That means the entity choice a company selected could change sometime during the Trump administration. In the past, accountants probably talked to clients about forming an LLC to alleviate the liability burden of someone's personal finances and to possibly earn more money by taking a cut of corporate profits while earning a salary.
Accountants usually dish out entity choice advice by showing business owners how much money they must pay under different structures. A sole proprietor, or self-employed individual, might have to pay a high employment tax. Those in partnerships pay high employment taxes as well. With an LLC, owners have a salary and also pay employment taxes. Each structure has is pros and cons. For example, there are certain tax benefits offered to an LLC that sole proprietors aren't eligible to receive.
With looming cuts to income tax rates, advice about entity choice could move to another facet of entrepreneurship. A C corporation may look more attractive to business owners who retain their earnings. If Congress passes Trump's proposal, a C corporation will have a significantly lower tax rate compared to the individual tax rate given to pass-through entities such as LLCs. However, the tax rate would also lower for LLCs.
For companies that already have a legal entity, owners should have a wait-and-see attitude regarding entity choice. In short, reducing a corporate rate without reducing the individual income tax rate may favor C corporations. Dividend payments with an S corporation or an LLC could distribute to owners without them having to pay additional income tax.
Pass-through entities have other advantages as well. Dividing the assets when an owner dies becomes easier due to the highly-structured rules that an LLC must have. There are articles of incorporation, laws of a particular state and laid out plans that business owners clearly write out as part of their business structure. Those assets may have different kinds of income tax rates applied to them once owners leave a company or pass away.
Accountants must provide information about new laws that may change the way corporations pay taxes. That's why even small firms should stay abreast of the news coming out of Washington. Reforming income taxes may alter the way entrepreneurs decide on an entity choice with regards to their companies and the advice accountants offer new business owners.
Photo courtesy of Stuart Miles at FreeDigitalPhotos.net
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