The Most Important Decision a Business Owner MakesMay 22nd, 2014
Who to hire? What job to take? Increase or decrease the bid? These are some decisions business owners face every day and, at the time, may seem to be very important tothe business. However, the most important decision a business owner makes, is under what legal entity structure the business should operate. A wrong decision and the owner could be facing bankruptcy and continued personal debt long after the business ceases to operate.
Should you incorporate? Should you form an LLC? Perhaps a sole proprietorship or a partnership is what you choose. In each case, the owner’s personal exposure to business liabilities and the amount of tax that will be paid are directly impacted.
A major disadvantage of sole proprietorships and partnerships is that they do not offer the owner asset protection from business liabilities while Corporations, including Subchapter S Corporations and LLCs do.
Although regular C Corporations provide asset protection, a major disadvantage is that income can be taxed at both the corporate and individual levels (double taxation). Limited Liability Companies offer a flexible alternative to sole proprietorship, partnership and corporate legal forms. LLCs make available the best of both worlds: asset protection with pass-through of income and losses directly to the owners. S Corporations can also be used by small and closely held entities to achieve the same goals. However, LLCs are preferred under certain conditions. For example, income and losses in a LLC can be allocated to members disproportionately, thereby allowing for different ownership classes. S Corporation income must be allocated to members based on ownership percentage. Also, unlike S Corporations, LLC members can be corporations, trusts, foreign individuals or any other type of entity. LLCs also do not have a requirement for filing annual minutes and filing an annual report with the Arizona Corporate Commission. An LLC can choose to be taxed as a sole proprietor, a partnership, a regular corporation or a Subchapter S Corporation.
Deciding on a legal form for your business is not easy. Each form has its advantages and disadvantages. The best first step is to sit down with your financial advisor and share your goals. The answer to the most important decision a business owner makes, the proper form of business, can be a launching pad to reach the next level of success. If you have more questions about making the right decisions with regard to your small business, contact Flowers, Rieger and Associates, PLLC. Call our Tucson CPA firm today at (520) 327-8706 or click through our website for the information you need to get started.