Choosing the Right Business Entity

Choosing the Right Business Entity By Rosa Martinez Professor Smith English 315 February 24, 2012 TRANSMITTAL TO:Small Business Owners FROM:Rosa Martinez DATE:February 24, 2012 ------------------------------------------------- SUBJECT:Choosing the Right Business Entity ------------------------------------------------- Enclosed is the Justification Report covering information related to different types of entities that could be chosen to establish a business.

Furthermore, the report explains in full details the advantages and disadvantages of each business entity, and how those factors could fulfill the needs of each particular individual.To ensure that the right structure is selected, I will be glad to further discuss the details with each one of you, in case that you have any questions. Attachment TABLE OF CONTENTS I. Introduction A.

The Problem: Higher tax rate with the wrong entity The Method Used Entities Comparison A. Sole Proprietor Advantages Disadvantages Sub-Chapter S Corporation 1. Advantages 2. Disadvantages Limited Liability Company 1. Advantages 2. Disadvantages Conclusion: All Business Owner Have Their Unique Findings for their Right Entity * * * * * * * * * * Executive SummaryWhen starting a business is very essential that the correct business entity is chosen to properly plan for a lower tax bracket.

Many small business owners are clueless when it comes to choosing the correct entity structure for their business. In this report we will analyze the pros and cons of three (3) different entities that favor the small business owners. We will get into details as far as to receiving refunds from the Federal government in order to help ease the startup cost of the business. The Problem: Higher tax rate with the wrong entityMany ambitious small business owners have to decide to choose from business entities such of sole proprietorship, partnership or corporation. The main issue with the wrong selection of an organization structure is that of a higher tax rate --a higher tax rate that could bring you either success or failure. A decision to opt for the correct entity could be an easy task for many, but a time consuming and difficult duty for others.

This decision is unique to everyone; therefore, making the right choice could be very difficult. The second most important issue with choosing the correct entity is that of liability for the owner or owners.Having an entity structure that protects the owner’s personal assets is essential for the business owner. It is difficult enough to not only lose capital from the business, but to allow a liability where your personal assets could be taken, as well. The Method Used The main method used to analyze the best entity to choose was primarily the comparison of the three (3) different entities. The pros and cons of each of them will give us a better understanding as of which one is the correct entity for a particular person.

Sole Proprietor Advantages * Easy and inexpensive to start.As easy as filing a trade name with the county or city where the business is situated and inexpensive as a trade name filing for around twenty dollars ($20). * Easy to change to a different entity for better tax benefits. * Easy to close its doors if the business does not go as planned.

Disadvantages * Unlimited liability to the owner’s assets. * Finding funds from potential investors will be difficult with this entity since the liability portion tears away investors. * Less attractive to prospective employees. * Business profit is taxed first with self-employment tax, and then with a regular taxation.If the business is generating over fifty thousand dollars ($50,000) in profits, one should never choose this entity especially when the taxpayer does not have any dependents under the age of seventeen (17) to acquire child credits and lower tax brackets.

* Higher Internal Revenue Service (IRS) scrutiny with over one hundred thousand ($100,000) in gross sales. The IRS stated that the sole proprietorship is much more likely to underreport its income. Sub-Chapter S Corporations Advantages * Limited Liability to the shareholders (owners) personal assets. Investors are more likely to invest in this type of entity due to its protection, and easy acquisition of the company stocks. * Pass through entity: This simply means that in most circumstances all income pass to the shareholders to be reported under their personal income tax returns; therefore, profits are being taxed once vs.

a C corporation where it is first taxed as the corporate level, and then in the shareholders personal return as dividends. Tax as dividends are tax max at a fifteen percent rate (15%) but it is still a double taxation. Most businesses have losses at the beginning of their operations.Having this type of entity can save in personal income tax against other income the shareholders report. Losses can be carried backwards during two (2) years, and or forward for twenty years if not fully used.

Disadvantages * Very complex to keep in compliance with federal and local government. * Active shareholders compensation is required in a payroll. This requirement can be very expensive for a micro company since payroll taxes matching FICA (Federal Insurance Contribution Act) would be required. * Additional reporting in business records, in order to keep track of shareholders’ capital.Partnerships or Limited Liability Company Advantages * Easy to set up at the state level. * Limited Liability for the personal assets of the members.

* Easy to maintain with the state annual filings. * Can raise money with the addition of unlimited new members. * It is a pass through entity with the same concepts as explained above for the Sub-chapter S. * Limited Partners are not subject to Self-employment income.

Disadvantages * Decisions need to be done after deliberating with all members. Since decisions are shared, many disagreements may arise. * General members have unlimited liability for the company’s debts. The company may have a limited life: death of partners or withdrawals.

* Profits made should be shared between partners, despite the fact that some members could have fewer responsibilities than others. Conclusion: All Business Owners Have Their Unique Findings for their Right Entity Even though an entity structure could be changed, all small business owners need to take in consideration their unique circumstances, in order to make a decision as to what entity would be the right one. As we saw in this report, choosing the wrong entity has lots of potential for profit loses related to the tax system --or even worse, to a lawsuit.Many are at stake, and careful decisions need to be taken in order for the small business owner to protect its assets. Works Cited Jackson, R. D.

(2011). Choose the Right Legal Structure for Your Business. Portland : Law Offices of Ronald D. Jackson Mezzullo, L. A.

(2010). Limited Liabilities and Family Entities. In L. A. Mezzullo, Limited Liabilities and Family Entities (pp.

79-95). Illinois: ABA Publishing Unknown. (2011, 02 24). Choose Your Business Structure.

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