Small Business Formation Basics - Tax Considerations

Most small business owners wonder what they can do to decrease their taxes.  The best answer for all small business owners is simple:  Focus on growing revenue and you will find taxes will not matter. Following this philosophy is all the more important for start-ups. In the first five years of business, growth can fix most issues. Growth, not decreased taxes, is the lifeblood of your business.

Regardless, it is important to discuss tax issues when forming a business.  When you form a business in Pennsylvania, you have several options.  The most basic form of business in PA is the sole proprietorship. The IRS treats sole proprietorships as a disregarded entity. If you’re unfamiliar with the legal jargon, you may ask “a what entity?”  A disregarded entity is one where the owner files both business taxes and their self-employment taxes on the same return. For most, this is the easiest option for running their business since there is less formality and government entanglement.

The complexity changes when it comes to corporations. Forming a corporation is the most secure option for small business owners looking to limit lawsuit losses at a personal level. Why?  Because with a corporation, the company owns the assets and services that might be subject to a suit – not the board, managers, or individuals like the sole proprietorship. Corporate liability, while important, is a topic for another day. 

So, what about the taxes on a corporation? In this business form there are two levels of taxation. The first is at the corporate level. Here the company pays 21% tax on its profits. The second level is for business owners and investors. These individuals are subject to income taxes on their salaries. Investors are subject to taxes on any dividends and a capital gains tax if they sell shares. So, while it has its place, a corporation is often not ideal for start-ups because of the tax complexities and corporate formalities. 

Now is an appropriate time to discuss S-Corps. A lot of questions and requests focus on S-Corps. An S-Corp is not a business structure; it is a tax election. It will come up in our next corporate entity discussion - the LLC.

From a legal standpoint, a limited liability company or LLC is a newer business structure. An LLC provides much of the same protection from liability as a corporation without the formalities. It also gives its members a couple of different tax options. This is where the S-Corp election comes into play. Whether a single member or multi member, an LLC is a disregarded entity. At formation the IRS treats it as a sole proprietorship or a partnership for tax purposes. In many instances, this works best. Those concerned with taxes have the option to elect to be taxed as an S-Corp. The difference in choice determines how the members pay themselves.

If the members elect taxation as an S-Corp, they will have to follow certain tax rules. The LLC may only have one class of stock, may not have more the 100 owners, and cannot have outside corporate owners.  Members are also required to take a reasonable salary, subject to all standard taxes. Members can make distributions that are not subject to self-employment taxes. The catch is that the IRS has never provided any insight about what is “reasonable”. This could mean more costs for accountants and lawyers to pay less taxes. 

At The Skeen Firm, we are passionate about small business growth and are here to help all small businesses achieve their goals.  Let us help you choose the right tax election for your situation, so you can focus on growing your business!  Contact us by phone at 724-550-6970 or by email at info@theskeenfirm.com to schedule your free consultation today.

*Disclaimer: the advice provided is for informational purposes and is not intended as legal advice.  It should not be relied on, nor construed as creating an attorney-client relationship.

LLC filings are easy and cheap—true protection is priceless.

You filed Articles of Organization for your own LLC, saving yourself a lot of money. Great! Now you can run the business of your dreams without the fear of impact to your personal assets. Well, not completely.

Liability protection only exist if there is a corporate veil. A corporate what? The corporate veil assumes the business and its owners are separate entities. This separation is one of the major benefits of forming an LLC. So, how do you create it? 

Pennsylvania LLCs are not subject to the same formalities as corporations. The corporate formalities are instructive nonetheless. LLC owners should have an operating agreement. Like corporate by-laws, an operating agreement provides the framework of the LLC. 

New LLCs need start-up capital. LLCs should maintain enough capital to cover its debts. Capital goes to the LLC and not an individual member or manager. Directing it to them can create a commingling issue.

LLCs should maintain separate bank and credit accounts to avoid commingling. Separate accounts make it more difficult for creditors to prove individual liability. Note, this does not cover debts with personal guarantees.  

Whoa! Getting and maintaining liability protection is not as simple as filing Articles of Organization. 

Contact The Skeen Firm today if you have questions about your LLC. We are passionate about business success and asset protection. 

*Disclaimer: this article is for informational purposes only. It is not providing legal advice. It does not create an attorney-client relationship. 

PPP Guidance Changes

We are here to help your small business as PPP guidance changes. Contact us today at 724-550-6970 or info@theskeenfirm.com if you have any questions.

Sole Proprietorship or LLC – How to go about Small Business Formation

There is no time like the present to start your business. With a favorable tax environment and technological advances that act to reduce barriers to entry, working for yourself and calling the shots has never seemed more attainable. For many, the ideas come natural, but every other step in the process is foreign. There are filings, meetings, fees, and an endless list of other associated regulatory measures that keep many from pursuing their dreams. However, with sound, affordable legal guidance anyone can get their ideas off the ground and chase their passions. (Think of how much more successful the Pet Rock would have been with the Internet.)

Formation is perhaps the first major hurdle for any new business. Each designation recognized by the Commonwealth comes with a variety of benefits and potential issues. Making the right determination early will set the stage for long-term success. The following discussion is aimed at clarifying two of the most popular and practical formation solutions. 

• Sole Proprietorship – This option is the least costly if going it alone. There are less regulatory hurdles, as the government recognizes you as the business, so there is no need to maintain separate financial accounts and accounting methods. The same holds true for taxes, as you will get taxed as self-employed. Potential issues for owners in this structure are sole liability for all business debts meaning you are subject to personal lawsuits for business related activities. 

• LLC – Limited Liability Company (LLC) is a structure that protects the individual manager/owners/operators from most personal liability for debts and lawsuits brought against the business.  An LLC is also considered a pass through entity for tax purposes, depending on the elections during formation, which can shift some of the tax burdens. There are potential significant drawbacks related to filing fees to form an LLC with the state. Once formed there are meeting requirements and ongoing regulatory fees, as well as maintaining operations as a going concern under state law. One major requirement is the separation of banking accounts and other business records. Failing to follow through on these requirements could cost the business at tax time, which is a major setback in the near term and potentially the long term. 

While the above addresses a laundry list of benefits and potential issues, it is in no way comprehensive. At The Skeen Firm, we are committed to answering all of your business questions in depth and ensuring your business journey starts with solid footing.

Call us today, at 724-550-6970, or email at info@theskeenfirm.comto schedule a consultation to discuss affordable solutions to start your business and pursue your dreams.  

*Disclaimer: The advice provided is for informational purposes and is not intended as legal advice.  It should not be relied on, nor construed as creating an attorney-client relationship.