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The 2018 Tax Law Changes - When Purchasing a Business – Should You Form an LLC or an “S” Corporation?

Submitted by HTFDBUS on Mon, 01/01/2018 - 16:32

In view of the 2018 tax law changes, probably the most important step you will take. Whether your going to purchase or start a business - you are immediately confronted with what should the legal form of ownership for your new business be, in other words should you be a sole proprietor, LLC, LLP, S Corp or C Corp. You should get out in front of this long before you purchase or start your business. Accounting professionals have different views on this but we say to you to first take a look at the competitors and the industry that you are buying the business to see what type of company formation many of them undertake.

Military Active, Military Retired? Military Veteran? If you are a military veteran and you receive medical care or prescriptions from the Veterans Administration (VA) and you are required to make co-pays listen up. If you form your business as an LLC and you are audited by the VA for income verification purposes the VA examiner will consider the entire income from the LLC to be your personal income. A good example would be for the tax year the business revenues are $400,000 and the business has an operating profit of $20,000. The VA would consider your personal income to be the $400,00 and not the $20,000 profit. That's a game changer for you. So if you are in this classification consider forming a Sub Chapter S Corporation. Speak with your CPA and Attorney.

In this day in age you need to form either an LLC or S Corporation, versus starting a business as a “Sole Proprietor”. The risk by a lawsuit could negatively impact your personal holdings as well as the business. Plus, it’s not a great deal of money to organize an LLC or an S corporation. You can use an attorney to do this, or there are a number of internet sites that will prepare and file everything for you.

With our accounting background and 33 years of selling businesses our recommendation most of the time is to form an “S” Corporation. Legal professionals and some CPA’s will say form an “LLC” because it’s easier to print off the corporate filing forms, or faster preparation of an IRS Schedule C in lieu of an 1120S Tax Return.

A. When you organize as an LLC:

  1. You are a “member” in lieu of President, Vice President, etc.
  2. The money you take out as a “paycheck” you must immediately pay taxes (monthly), on to the IRS.
  3. There is less opportunity to accumulate money “profits” earned from the business in the checking or savings without immediately paying taxes on it to the IRS.
  4. If the LLC is sued attorneys can make the argument that the assets of the business and your are within arm’s length of one another and interchangeable; so you risk having personal and business assets tied up until the matter is adjudicated.

B. When you organize as an “S” Corp:

  1. You first file the regular corporate organization forms (have your CPA do this), then within 120 days you receive a form from the IRS that is called an “S” Corporation Election
  2. Form; just like when you get married you check of the “I do” box; now you are an official S Corp.
  3. As an S Corp you can have the title of President, CEO, COO, Vice President, etc.
  4. Any money you take out as a paycheck is considered just that “payroll”: and you don’t have to immediately pay the taxes; rather they are filed according to your predetermined deposit schedule with the IRS albeit monthly, quarterly, etc.
  5. Your profits that sit in the checking account or savings are not taxable until you spend the money; they are called “retained earnings”.
  6. If you are sued it is more difficult for the defense to prove co-mingling of assets or that you and your company are in arms length reach of one another.
  7. They are tax benefits to having an “S” Corp.
  8. Dividends paid to your stockholders are at the capital gains tax rate and not normal income. Did you know dividends are not subject to social security or Medicare taxes? If you yourself receive dividends you should have an annual salary commensurate with other business people in the marketplace.

Looking to Sell or Buy a Business? Contact the “professionals” at Hartford Business Brokers at (203) 552-2381 and let our expertise go to work for you. Call or email us. When forming a business consult an attorney.