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Why the Wrong Business Entity Can Cost You Money

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One of the essential elements of starting any new business is picking the right business entity to form. Your business entity affects how much your business costs, how you pay taxes, whether it offers the right combination of flexibility and protection for you, and whether it will meet your future needs.

Tax Implications

There are several considerations to make regarding how your business will be taxed. Different business entities pay taxes differently. Because a corporation is taxed separately from its owners, they are frequently taxed twice, known as double-taxation, in the form of the corporation's income tax and the distribution to its shareholders. However, you could form an S Corporation instead of a C Corporation, and the business's profits will pass through to you as its owners, which you then report on your income tax filing. If you want to form an LLC instead, there are four different ways you could elect to be taxed, so speak with a lawyer and a CPA to find out which one is best for you.

Additionally, if you are an employee-owner of a business, you need to decide how to pay yourself, and the method you choose can have tax implications. Profit distributions, for example, are not taxed as income, but a salary is.


Lability Shielding

Depending on the business entity you choose, you have different degrees of protection from liability. As a sole proprietor or general partner, you could be sued and held personally liable for the business's actions. You could find yourself saddled with court fines and lawyers fees. As a limited partner or a corporation member, you have protection from the business's actions. You should check with a lawyer, as CPAs cannot give legal advice.

Shares and Voting Rights

Each business entity handles management and ownership differently. You want to be sure the entity you choose allows you to form the structure that best suits your needs.


Future Transfer

If you think you may ever want to see your business transfer ownership, consider the effect the business entity you choose could have on how much you are charged in taxes for gains the business earns. For example, if you form an entity to serve as a holding company for growth investments, you may prefer a partnership structure as it averts a tax on the money you never actually received.

Charlotte business owners and startups can rely on a small business CPA, Scott Boyar, CPA, a Charlotte NC accountant who has helped numerous business owners determine the form or of change Charlotte's business entities. To have Scott help you pick the right business entity to save and make you money, visit him at

Posted by Scott Boyar CPA


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