Establishing the Correct Business Entity in DC
Businesses can be set up and managed under various types of structures. These include sole proprietorships, partnerships, S corporations, C Corporations, and limited liability companies. The type of entity that you select may also change over time as your personal situation changes and also you may have the need for more liability protection. This brief article will help you make a more informative decision.
The correct choice of entity will usually depend on which entity allows you the most deductions and tax benefits.
Many people create S corporations and limited liability protection to protect their personal assets from creditors. However, these entities will not protect you from professional errors from omissions or tortuous acts. In these cases you will need adequate liability insurance to protect your assets.
Tax differences of the entities are as follows:
- C corporation income is taxed at the corporate level. Professional corporations are subject to a maximum tax rate of 35%. Any income left in the corporation at the end of the year can be distributed to owners as dividends. As a result, such entities are subject to double taxation.
- Payroll taxes for the owner employee are paid by the owner for sole proprietorships and limited liability companies. For corporations the company is responsible splits the FICA taxes with the owner and pays the owners unemployment taxes. The owner-employee pays FICA taxes on their wages.
- Medical reimbursement plans are not available to S corporations. Other entities can take advantage of this plan.
- Disability insurance may only be deducted by C corporations. Other entities cannot take advantage of this deduction. Section 179 deductions are also only claimed at the corporate level with C corporations. Other entities claim this deduction at the individual level.
Non tax differences include the following:
- Paperwork is more demanding for corporations. They must keep separate checkbooks for the company, file separate returns, have annual meetings, and file an annual disclosure statement with the state.
- Income is much easier to split in an S corporation and limited liability company. These entities can have multiple members or shareholders to spread out the income to individual tax returns.
- In the case of death sole proprietorships and limited liability companies have their assets marked up at death. Corporations have their shares marked up to their fair market value.
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