Choosing the Right Business Structure: Beyond the Basic LLC

With S Corporation tax treatment, you only pay payroll taxes on your actual salary, not on your profit distributions, potentially saving around 15% in payroll taxes on those distributions.

One crucial consideration with S Corporation tax treatment is the requirement for "reasonable compensation." The IRS requires S Corporation owners to pay themselves a reasonable salary for their services before taking profit distributions. What constitutes reasonable compensation can be subjective, however, and getting it wrong could result in serious consequences, including reclassification of all distributions as wages subject to employment taxes, plus potential penalties of up to 100%. 

BEYOND BASIC LIABILITY PROTECTION

While liability protection is often the primary reason entrepreneurs choose to form an LLC or corporation, each structure offers different levels and types of protection. Professional corporations (PCs), for instance, can offer specialized protection for licensed professionals like doctors, lawyers, and accountants. Series LLCs allow real estate investors or entrepreneurs with multiple business lines to create separate "series" within one legal entity, each with its own liability shield.

C Corporations, despite their reputation for complex administration and double taxation, can offer unique advantages for businesses generating significant profits because a C Corporation structure allows for sophisticated planning opportunities (the nature of which is outside the scope of this article but book a call with me to learn more). The current corporate tax rate of 21% can also be advantageous for businesses reinvesting profits back into growth.

However, C Corporations do face the challenge of double taxation, where profits are taxed first at the corporate level and then again when distributed to shareholders as dividends. This is why many smaller businesses opt for pass-through entities like S Corporations or LLCs, where profits are only taxed once at the individual level.

MAKING YOUR DECISION WITH GROWTH IN MIND

When choosing your business structure, consider not just where your business is today, but where you want it to be in five or ten years. Will you want to bring in outside investors? Are you building a business to sell or creating a legacy to pass down? Do you plan to expand internationally? These future plans should heavily influence your choice of entity today.

For example, if you're planning to seek venture capital funding, a C Corporation might be more appropriate despite its higher administrative complexity. Venture capitalists typically prefer C Corporations due to their flexible stock structure and familiar operating requirements. Or if you're a solo professional service provider expecting steady growth, an S Corporation election could offer better long-term tax advantages than a simple LLC.

Remember too, that certain structures have specific requirements that might affect your future flexibility. S Corporations must meet several criteria, including:

• Having no more than 100 shareholders
• All shareholders must be U.S. citizens or permanent residents
• Can maintain only one class of stock
• Must be a U.S. corporation
• All shareholders must consent in writing to the S Corporation election
• Shareholders must be individuals, estates, or certain qualified trusts

Additionally, consider the administrative burden each structure requires. While sole proprietorships and partnerships offer simplicity in formation and operation, corporations and S Corporations require more rigorous record-keeping, regular meetings, and documentation. Factor in these ongoing requirements when making your choice, as they represent both time and monetary costs to your business.

Finally, to maximize the benefits of the right business structure for your business, make your decision with your eyes wide open - educated about and aware of all available options. The stakes are too high to go at it alone; you need a knowledgeable, trusted advisor on your side.

THE ADVISOR YOU NEED WHEN DECISIONS MATTER

As your trusted LIFTed Business Advisor and attorney, I understand that choosing the right business structure involves carefully weighing multiple factors, from tax implications to growth plans. That's why I offer a comprehensive LIFT™ Business Planning Session with Sky Unlimited Law where we'll analyze your current and future needs to help you make the best choice for your unique situation. Together, we'll develop a plan that not only protects your business today but positions it for the growth and success you envision for tomorrow.

Book a call here to learn more and get started today.

This article is a service of Sky Unlimited Legal Advisory PC, Personal Family Lawyer® .  We're not your traditional law firm, we stand apart from the rest by helping you make informed and empowered decisions on how to deal with your business throughout life and in the event of an emergency. We offer a complete spectrum of legal services, including a New Business Planning Session or an Existing Business Review Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. You can begin by calling our office at (650) 761-0992 today or book online to schedule a Business Planning Session and mention this article to find out how to get this $950 session at no charge.