The Bottom Line
The Bottom Line is where Klatzkin’s advisors provide analysis and insight into key developments in taxation, accounting, and other issues and how they affect businesses and individual taxpayers.

Choosing a Business Structure

By MICHELE D. SLOCUM, CPA

February 28, 2020

Starting a new business is an exciting time where entrepreneurs transform their new or innovative ideas from drawing board to production and delivery. During these initial stages, a business owner has to manage multiple demands and priorities to get key people, processes, and structures into place. For new manufacturing companies, this might mean investment in facilities, machinery, workers, and an ordering system. For construction companies, the focus may shift to new business development, workforce recruitment, and identification of key suppliers and vendors. While these priorities are essential to operations, it’s essential not to forget about the choice of entity selection. Selecting an entity with the IRS determines how owners are taxed and what federal returns need to be filed. There are five major entity types to choose from, each with unique benefits, drawbacks, and tax consequences. To help clients, prospects, and others, Klatzkin has provided a summary of each below.

Types of Business Entities

  • Sole Proprietorship – This is one of the most common types of business structures because it’s straightforward to establish with low start-up costs. There are no state filings or application submission fees, and all business income and loss is reported on the owner’s tax return. One drawback is that an owner remains personally liable for lawsuits and other legal actions filed against the business.
  • Limited Liability Corporation (LLC) –This entity type is very flexible and allows an owner(s) to be somewhat creative in how income and ownership are separated. Since they are independent legal structures separate from their owners, there is no personal liability (outside of personal guarantees) for the financial obligations of the business. These entities are governed by operating agreements but are not required to hold annual meetings or record minutes.
  • C-Corporations – This entity type is an independent tax and legal structure, and there is no limit on the number of owners. The entity can be difficult and expensive to set up, requiring a lot of paperwork and recordkeeping to maintain. This entity type is the only one subject to double taxation. However, it’s an optimal entity structure for those seeking to recruit investors to raise capital.
  • S-Corporations– This entity type is considered a hybrid between C-corporations and LLCs. Income is taxed at the personal level, similar to other structures mentioned above. S-Corporation’s also removed personal liability for the financial obligations of the business. However, the setup process can be difficult and costly.

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There are many options to choose from when selecting an entity structure. For this reason, it’s important to consult with an experienced tax advisor who can assess your situation and determine the right option. If you have questions about any of the information above or need assistance with a tax planning, compliance, or structuring issue, Klatzkin can help. For additional information, call us at 609-890-9189 or click here to contact us. We look forward to speaking with you soon.

About the Author

Michele is a Manager focused on serving the tax planning, reporting, and compliance needs of real estate, professional service and nonprofit organizations. She enjoys working to find tax-saving opportunities, many created through tax reform, including Section 199A deductions, bonus depreciation and capital gains deferral through investment in Qualified Opportunity Zones.    Going beyond the expected...

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