This is the next post in a series of articles discussing forming a business in Long Island or other areas of New York. The previous post provided basic information about the primary entity types and reviewed some of the pros and cons of each. Because each business’s needs and objectives are unique, it is important to understand which type of entity will be most beneficial for you. This article will address another common concern for business owners – the tax consequences associated with choosing one entity over another. This is a complicated area for attorneys and tax professionals alike. It is important to retain an experienced business lawyer to assist you in the process. Contact my office today to speak to an attorney.
A key element in choosing the appropriate business entity is protecting the business profits from undesired taxation. Unfortunately, there is not a “one-size fits all” choice of entity. Depending on the ownership structure, whether the company intends to have employees or the types of business activities, different entity types may be more beneficial to different businesses. In its most simple form, profits made through a sole proprietorship are considered and taxed as personal income of the proprietor. Typically there are no separate tax returns for the business and the owner is subject to self-employment tax. Similarly, a single-member limited liability company (LLC) may be considered a “disregarded entity” for tax purposes. This means that the profits and losses of the entity are passed directly through to the owner. Company tax information is filed along with the owner’s personal return and the owner is subject to self-employment tax.
Tax issues are more complicated in the case of C-corporations, S-corporations, and multi-member LLCs. A C-corporation, regardless of the number of shareholders, will be subject to “double taxation,” meaning taxed at the corporate level and again at the shareholder level. When appropriate, many corporations elect to be taxed as an S-corporation (under section S of Chapter 1 of the federal tax code.) S-corporations avoid double taxation by paying their owners a reasonable wage. The wage is subject to self-employment tax, but the entity itself is not taxed on retained profits. An LLC with two or more members may be taxed as a partnership, thus sharing profits and losses among the members. It may also elect to be taxed as an S-corporation when appropriate.
When considering business taxation issues, it goes without saying that mistakes in planning can lead to adverse tax consequences. Conversely, understanding the rules can result in significant tax savings and benefits. Engaging an experienced business attorney can help educate you on the most appropriate choice for your business. If you need assistance, contact my office today to speak to a Long Island business lawyer. We also serve Kings County residents in Brooklyn, residents of Queens, those in Nassau and Suffolk Counties, as well as people in other New York areas.