So in part 1 we talked about the benefits of retirement accounts, and in part 2 we looked at the advantages of PTET. Today let’s explore Entity Selection.
Why does entity selection matter?
While it may seem trivial, the entity you choose for your business can dramatically impact your tax bill, your take-home pay, and your ability to grow. It determines how (and when) you pay taxes, what deductions you can take, and whether you’ll face double taxation. And what is best today, may not be the best tomorrow. So taking time to ensure your in the optimal entity type can save you thousands in taxes.
What options do I have?
In the US there are 4 primary entity options:
Sole Proprietorship
➜Pro: Often offers a higher 20% QBI deduction
☒ Con: You pay self-employment tax on all profits
Partnership
➜Pro: Often the most flexible entity for splitting profit\loss
☒ Con: You pay self-employment tax on all income
C Corporation
➜Pro: Flat 21% corporate tax rate
☒ Con: Double taxation (profits + dividends)
S Corporation
➜Pro: Owners can save on self-employment tax with reasonable salaries
☒ Con: Must pay reasonable salary to owners
Strategic approach:
When picking an entity, or reevaluating your current one, make sure you’re talking with your advisors about the following:
1. Do I plan to keep profits in the business or take them out?
2. How will I pay myself – salary or distributions?
3. Will I qualify for the 20% QBI deduction?
4. How many owners will there be, and who are they?
5. How does my state treat each entity?
Tomorrow we’ll wrap the series up with maximizing QBI deduction!