Are You in the Right Business Entity? Maybe it’s Time for a Change.

Recently I wrote about the importance of every business owner  understanding what entity their business is in and how it works so that your can take advantage of all that it offers.  And, as your company grows or changes, you need to realize that you can change the entity to minimize your taxes.  Each entity has its own set of benefits.  However, in today’s blog, I want to describe some responsibilities, how your financial statements are affected by your entity and plant a seed on how you can save thousands of dollars in taxes.

Responsibilities of entity

The benefits of an entity bring a sigh of relief while the responsibilities can bring stress.  For example, if you are an S or C-corp you are required to have corporate minutes each year as well as the Officers of the corporation are required to be on payroll. However, look at it this way; doing the minutes and processing the payroll can save you thousands of dollars.  Yes, it is a responsibility, but I like to call it an opportunity!

Chart of accounts of entity

How you set up your chart of accounts in your financial software can provide fantastic information on projecting your tax situation.  Every business owner needs to understand the term “above the line and below the line.”  These terms paint a clear picture of how the entity will be taxed.

For example, where you enter your medical insurance will affect what your profit says on your Profit and Loss Statement.  If you are a sole proprietor or LLC, you want to enter this account as an Other Expense, because it is not a business expense on your return (a below the line transaction), but rather a deduction on your personal tax return.

General Comments

I usually offer recommendations to a business entity based upon the projected income, projected profits and/or losses over the next 5 years.  Another aspect that will determine the best entity is what the owner wants to accomplish with her business.  It could be to offset other income or build up a retirement account or to run all medical expenses through the business, including prescriptions or doctor visit costs in an accountable plan.

For example, I had a new client come to me in the middle of 2010.  He owned an LLC.  He was projecting to have a good size profit for the 2010 year.  Since he expected these profits to continue for the upcoming years, I recommended that he do an S-election.  We filed in October 2010 and got the IRS’ approval to file his 2010 tax return as an S-corp for the entire 2010 year.  With just his 2010 tax return, he saved $26,000!!  And, the savings continues every year!!

So the bottom-line question is, “Are you in the right business entity?”

Not sure?  Email me to get my 4 page entity comparison chart with my compliments.

About Renee Daggett

Renee Daggett is the founder and President of Admin Books, Inc, a bookkeeping and tax firm. She is also the author of “Your Financial Flight Plan: Pilot Your Business To Profitability”. Renee lives her life with purpose and helps her clients find peace of mind as they achieve success in their businesses.

Comments

  1. Interesting post.

    I wonder whether it is easy to convert an LLC into an S-Corporation from the legal perspective OR changing the company type with IRS would be sufficient, i.e. just request for the change of an LLC to be taxed as an S-Corporation.

    Thanks.

  2. I have found the best thing to do is elect to file your LLC return as an S-corporation. You need to fill out a form with the IRS to get approval. It usually takes about 6 weeks. The best thing is you can request to have it be retroactive as of January 1st of this year! Let me know if you have any other clarifications. Renee

  3. Renee,

    YES PLEASE send me the comparison chart — been noodling on this for a while now. Trust you are well!

    Thanks, Jenn

  4. like a copy too

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