A client needs to select the right structure of the business depending upon the client’s goals to achieve the most tax savings. The client can run the business as a sole proprietor, partnership, Limited Liability Company, Limited Liability partnership, S or C corporation depending upon business objective and risk involved in their industry.
Each type of entity will require the filing of different types of tax forms for tax preparation. However, each business will require bookkeeping for tax preparation and preparing financial statements. Depending on the employees, each entity will also require payroll preparation. Each entity structure has different tax advantages, disadvantages, and risks. Each client depending upon business goals must choose the structure of the entity for the most tax savings. A brief discussion of each type of entity is given below:
So, if a client’s business does not have any risk involved for lawsuits as in the case of Physicians, Lawyers, and Accountants, a simple proprietorship or partnership will be good to use. Otherwise, an LLC can be used with the election of taxes filing as S corporation or just use the S corporation for operating a business. C corporation is usually used to protect from unlimited liabilities. All profits must stay in the corporation only. C corporation can have more than 100 shareholders. Dr. Rastogi can help a client in making an intelligent decision for forming the right structure of the business considering the business risks and goals.
- Sole Proprietorship: This is easy to form and does not require any state registration. However, it is recommended to register a fictitious name with the state where one is conducting the business. However, Sole Proprietorship has the risk of the most personal asset in case of a legal lawsuit against the principal owner of the business. Sole proprietors will also be responsible for the employment taxes on the total income of the business. For tax preparation, a client will file form 1040 with schedule C for the business.
- General Partnership: When two or more business partners want to run a business without registration of a company with the state, it is like the sole proprietorship with multiple owners. It is easy to form but all partners are at risk for personal assets in case of a legal lawsuit against the owners. All the profits in the business will be divided among the partners and each partner will pay employment taxes on their part of the profits. All partners will need to have a written document for their percentage of ownership in the business. For tax preparation form 1065 will have to be filed and each partner will get a schedule K for their part of profit or loss.
- Limited Liability Company (LLC): This entity structure will help clients to protect personal assets against a legal lawsuit. The owners can lose the assets that they have put in LLC. However, LLC must be registered in a state preferably where owners are conducting the business. LLC can be formed for proprietorship or partnership. All the income will flow through to the owners. In the case of a sole proprietorship, an individual will be the sole owner of all the stocks of the LLC and for tax, and the client will file form 1040 with schedule C for LLC. For two or more owners, tax preparation will involve preparing and filing form 1065 for partnership and every partner will get schedule K from the partnership return. Since LLC is a pass-through entity so all income earned by partners will involve paying employment taxes. Limited Liability Partnership (LLP) is just another business entity that is generally used by most of the professional business partners such as Lawyers, Physicians, and Accountants.
- C Corporation: C Corporation itself is like an individual running the business. People can own stocks of the corporation and may get dividends from the C corporation. Since there is no real owner of the corporation, in case of a legal suit it will be only on the corporation, and all shareholders are shielded from the legal liabilities. There is no limit on the number of shareholders and the corporation can have different classes of stocks. However, all the profit of the corporation stays in the corporation and the corporation pays taxes on all profits. At present under the TCJA, corporations pay a flat tax of 21%. However, a corporation is a double tax entity. First, a corporation pays taxes on the profits, and secondly the shareholders’ pay taxes on dividends. For tax preparation, C corporations file form 1120.
- S Corporation: S corporation is an election to change C Corporation status to a pass-through entity submitting form 2553. S Corporation election should be done as per the guidelines of the IRS. S corporation has a limitation of 100 stockholders and S corporation can only offer one class of stocks to every shareholder. An LLC can also elect to file taxes as an S corporation by submitting the form 2553. Every person or shareholder must take reasonable wages in an S corporation and the rest income of S corporation can pass to shareholders as dividends. S corporation does not pay any taxes by itself. The dividend taken by the shareholders from S corporation does not require the filing of employment taxes. S corporation also has full protection to the shareholders against any legal lawsuit. However, payroll income and profit distribution from the S corporation should be in a reasonable ratio to avoid an IRS audit. S corporation gives the best of both LLC and C corporation. It is to be further realized that any income which does not pay employment taxes including social security and Medicare taxes will not be included in the calculations of social security amount that one would be getting at the retirement age set by the social security office. For tax preparation, form 1120 S is prepared and submitted to IRS for S corporations. Each shareholder gets a schedule K1 from the s corporation tax return.
In addition to the structure, the business can be categorized for the type of industry. Dr. Rastogi himself as an entrepreneur has operated businesses in the retail, wholesale, service, and manufacturing industries. He understands what problems a small business owner faces in business and what expenses which are unique in a business should be included in the tax preparation. Dr. Rastogi has helped national and international clients in very diversified businesses encompassing retail, wholesale, service, manufacturing, and export/import. Various business owners who have been our clients belong to the following specific type of industries:
Service Industry
a. Medical and Dental practices; Law offices
b. Home health care facilities
c. Trucking and transportation, Long Distance
d. Software development
Retail/Wholesale:
e. Gas station, Convenience store and Grocery store businesses (retail businesses)
f. Restaurants
g. Hotels and Motels (Hospitality industry)
h. Jewelry businesses, retail, and wholesale
Manufacturing:
i. Manufacturing, product development, chemicals
Hybrid:
j. Real estate agents, real estate residential and commercial development, and rental business
k. Construction and property management
Crypto Currency:
Dr. Rastogi has helped clients in crypto currency transactions in tax consequences.
It is important to have a Tax Accountant who has real-life experience in running businesses. Based on his own business experiences Dr. Rastogi can help clients in tax preparations, bookkeeping for financial statements, and payroll preparation. Dr. Rastogi also has vast knowledge in helping clients in financial planning that includes Retirement, Investment, and Education savings planning.
