Business Entity Structures

Have you thought about the risks and challenges of having an improperly set up entity?

The true purpose of an entity is twofold:

1. Let the world know they are doing business with a business, and not you personally – otherwise known as a corporate veil

2. Ensure you are paying the least amount of tax possible

It is important for people to know they are dealing with a business.

An Entity Structure provides you with what is called a corporate veil.

In layman’s terms, this means there is a layer of liability protection between your personal assets and your business, should something unforeseen or unwanted happen in your business.  The limit of liability stops at the entity (if you operate correctly), meaning no one can touch your personal assets outside of the entity.  This is a very good thing!

When you begin your business, and are truly serious about building said business (it is no longer just a hobby), then it is wise to begin as a Limited Liability Company (LLC).

– Yes, you may be your business.

– Yes, the LLC may be what is called a Default LLC (meaning the net income flows to your personal tax return on a schedule C just as if you were a sole proprietor) AND you still have a corporate veil as long as you operate as two separate entities.

A Corporation is a more formal structure with Shareholders and a Board of Directors.

Either way, you will want to open a separate business bank account with the business entity tax id number.

Always think of your business as a person apart from yourself, or another entity

When it comes to tax, the S-Corp or C-Corp are actually tax designations.

A question I am often asked is:

“When should I become an S-Corp or a C-Corp?”

I answer this question based on an entity in the USA – a number of countries will have similar laws, just different titles, so check into your country’s guidelines.

Below, I am giving you my rubber meets the road version opinion on S-Corp and C-Corp matters.

 S-Corp

In an S-Corp, you are required by law to pay yourself a “reasonable wage” based on your type of business.  In other words, an amount you would pay someone else to do this work.

You are to pay yourself this wage in the form of a W2 payroll.

 C-Corp

The C-Corp is what I call the granddaddy of all entity structures, and has very specific reasons for being created.

It is truly a tax strategy to have a C-Corp in your picture.  By the time you are ready for this kind of strategy, you will have someone in your life that is helping you with these kinds of decisions.

A mistake I often see is people moving into an S Corp or C Corp structure before their net income numbers really warrant this level of structure

In my opinion, (and of course this depends on your entire tax filing picture) you do not require this level of structure until your net income is around that $50,000 mark.

Of course, in any situation there are circumstances as to why and how you would personally benefit from which structure.

My intention is to give you some insights and questions to consider as you explore which structure is best for you when.

I’d be happy to offer a bit more personal feedback if you are ready for some new structure.

If you have questions or comments, please post below in the comments or reach out to wealth@thecfolegacy.com and let’s connect.

** For insurance reasons, I must tell you I am not a CPA or a Lawyer, and as such am not able to provide you with Legal or Tax advice.  I am, however, a business woman who has been in the accounting services business for over 30 years and I have helped thousands of business owners pay less tax, and keep more of the money they make.**