When Forming A New Business Consider Tax Impact

Many people are forming new businesses at the bottom of this economic downturn.  This is common at this point in an economic cycle.  But it’s critical to think about the structure of your new business from a legal perspective and a tax perspective.

Businesses can be formed as C-corporations, S-Corporations, LPs,  LLCs, etc.  Currently, LLCs or Limited Liability Companies are the most popular.  This is due to what the name implies: an LLC provides shelter to individuals for legal liability.  LLCs are owned by “members,” not partners or shareholders.  Net income from an LLC is passed through directly to Member’s personal income taxes and are not taxed at the entity level.  But if there is only a single Member to the LLC, the company can elect to be taxed as a different form of company, like an S-corp.  So the company can be registered as an LLC and elect to be taxed in some other form.

Another issue is that single Member LLCs may require social security and Medicare withholding on the entire amount of income depending on structure and the amount of time the Member dedicates to the business.  This is tricky and requires some study.

Net, consult your attorney and tax accountant before establishing the structure of your new company with all these issues in mind.

— Steve Odland

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