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Choosing The Right Business Entity
Choosing The Right Business Entity
Choosing the right business entity is a very important decision all prospective business owners have to
make.
To simplify this process, we will determine the right business entity from a tax perspective. In other
words, the ideal business entity will be the one that produces the lowest business tax.
The three business entities we will choose from are: Limited Liability Company (LLC), S-corporation, and
C-corporation.
In this article, a business is considered profitable if the owner can take out a market salary from the net
profits.
John is a CPA who owns a tax consulting business called Tax Guru. If the market salary for a CPA with
John’s experience is $60,000 and Tax Guru generates profits of only $40,000, then Tax Guru Fails the
profitability test and should be set up as an LLC. Now if Tax Guru had profits equal to or greater than
$60,000 it is considered a profitable business, and should be set up as an S Corp or a C corp in order to
minimize self employment taxes.
S Corp vs C Corp
We’ve already established from the previous section in this article, that a business must be profitable in
order to be set up as an S corp or a C corp.
An S Corporation is suitable if the following apply: business owner is not in the highest tax bracket, the
business owner has a significant amount of qualified dividends and capital gains, the business expects a
loss in the future, and the business does not have a need for public financing.
A C Corporation is suitable if the business owner is in the highest tax bracket, or the business has a great
need for public financing.
Disclaimer
The foregoing is intended for educational purposes only and does not constitute legal or professional advice. Nothing
contained herein is intended to be used, or can be used, by any person to avoid penalties that may be assessed
under federal or any state law.