Interesting tax question for new businesses

[snowbank]

Assume that all else is equal, what expected income level of a new business would make one entity better than another? Assume the "all else is equal" includes low variance situations, so that the main focus of which entity you choose would be focused strictly around the potential tax benefits of the new entity. At what expected income levels should the entity change?

Ex:
$1-$100k: entity should be what?
$100k-$300k: entity should be what?
$300k-$1m: entity should be what?

Assume in one scenario, that someone's income outside of the new business is $1, and assume in scenario 2 that the person's income is $1 million. How would this affect your decision?

Interested to hear from tax experts/business people who have some knowledge on the subject.

Should your entity change, and if so, how, and at what levels of expected income?

 

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[snowbank]

Bump for possible discussion. Although this might end up being a simple answer and not that interesting, I didn't include a 2nd part that may affect that.

 

[GlobalWealth]

In nearly all cases, regardless of size, I recommend LLC's. This offers you the best asset protection from both inside and outside creditors.

However, your tax election is what needs to be considered based on income level. This depends on the nature of the income. If the majority of income is passive, the go with the default, or partnership tax election.

Otherwise, as a rule of thumb go with s-corp. tax election up to $1m in ebit, over $1m go with c-corp. tax status.

If someone has an income of $1m outside of the current business, I would hope the person uses various entities for ownership of the income producing asset that provides this $1m.

You don't want to put your income stream at risk due to unforeseen circumstances.

 

[TaxGuy]

Bobby stole the words out of my mouth

To add to this a C-corp usually has 100+ share holders. If you have any less you should be fine as an S-corp.

The difference between an LLC and S-corp is the LLC is a structure for liability purposes also known as a "pass through" entity in which officers are paid in "guaranteed payments" where as an S-corp is a tax treatment and you can take out a salary for as little or as much as you'd like. If the net proceeds are low or negative then you don't need to take out a salary.

 

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[snowbank]

Another part of the question- at what point should someone be leaving their money in the entity and have entity paying taxes rather than passing it through to the individual and have them pay?

Assuming the entity is very profitable and the person doesn't need money- the equation should be simple but there should be a number of different equations based on the other variables. I'm interested to hear how you'd break down the options for yourself or a client, and what type of variables you'd bring up as reasons for or against leaving the money in the company for tax benefits and the equation you'd associate with the variables.

 

[TaxGuy]

Bill- I'm gonna plead the 5th and say that any further discussion on this needs to go to PM or the Speedway and should not be on the public forums

Bottom line is the best entity is LLC taxed as an S-corp unless you reach the level of 100+ share-holders and can file as a C-corp. As an LLC you have good liability protection and get the tax benefits of an S-corp(no self-employment taxes, however, there is a limit to this).

 

[snowbank]

Bill- I'm gonna plead the 5th and say that any further discussion on this needs to go to PM or the Speedway and should not be on the public forums

Bottom line is the best entity is LLC taxed as an S-corp unless you reach the level of 100+ share-holders and can file as a C-corp. As an LLC you have good liability protection and get the tax benefits of an S-corp(no self-employment taxes, however, there is a limit to this).

https://www.thefastlaneforum.com/speedway-level-2/29556-tax-thread-x-post-request.html#post149549

 

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[GlobalWealth]

at what point should someone be leaving their money in the entity and have entity paying taxes rather than passing it through to the individual and have them pay?

This is very difficult to answer in generalized terms. I agree with Clint here this needs personal attention.

There are just too many options domestically and when you add offshore options the playing field is wide open.

For clarification though, both S-corps and LLC's are pass through entities so you are taxed personally on the income whether you leave it in the business or not.

If you want to leave money in the business without a personal tax consequence, you need to either be set up as a C-corp. or use some offshore planning tools.

But selecting the point at which you leave the money in the business is such a personal issue, there is no real way to give generalized advice here.