How to set up the Right Legal Entity
Entrepreneurs often make the mistake of not creating the right business entity for their business, or not creating one at all. They think it is something that can be done later and they wait to save money. As mentioned by 1800 Accountant in a recent article, taking this approach often costs more than it saves them in the long run. 1800 Accountant explains how the additional costs come from paying extra money in taxes in addition to creating a possible legal disaster for you and your family.
Any small business owner who opens a company without the proper legal documentation is automatically treated as a sole proprietor and is not subject to as many tax deductions and write-offs as some corporate structures. In addition, 1800 Accountant explains how sole proprietors are 3 times as likely to be audited by the Internal Revenue Service even though nearly 72% of all business tax returns are filed as unincorporated businesses. Another downside to keeping your business unincorporated is that you are personally held liable for any debts against the business or any legal judgments. Filing the correct legal entity can protect you and your personal assets and keeps a legal barrier between you and your business.
1800 Accountant explains the 3 primary business entities that can be filed:
· LLC (Limited Liability Company) - A Limited Liability Company (LLC) provides limited liability protection to its members. In most circumstances, members of an LLC are not personally responsible for debts and liabilities incurred by the company.
· S Corp (S Corporation) - S Corporations (S-Corp) are Corporations that have elected a special “Sub Chapter” tax election with the IRS. S Corporations provide the same limited liability to shareholders as Corporations; however, S Corporations are taxed as a pass-through entity.
· C Corp (C Corporation) - A C Corporation may not be the best choice for small or mid-size business owners, but they offer significant advantages in some circumstances, especially for start-up companies that are raising money through venture capital or angel investment.
There are also several different partnership filings that are best for certain entrepreneurs. For more information regarding which entity to file for your particular business please reference this article by 1800 Accountant or visit their website 1800Accountant.com.
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