LLC or Corporation?
Small businesses make up roughly half of the private sector employment marketplace. About half of those small businesses are now home-based operations, and around two-thirds are non-employee businesses. It’s not uncommon for this type of small business to run as a sole proprietorship without any formal corporate structure. While lawyers and accountants often advise against operating without an entity shield, many small service providers found little incentive to incorporate. That may change in 2018 due to the recent passage of the Tax Cuts and Jobs Act.
Of course, there are benefits to setting up a corporation or limited liability company. Every business owner should enjoy the organization and protective components that corporate formation offers. While those benefits may be less visible to a single-owner business, the tax reform law offers the possibility of some real tangible benefits.
The new corporate tax rate is down to 21% from 35%. For many years, this rate only affected larger businesses. Now, however, at 21% some small business owners could elect to incorporate as a C-Corporation if the 21% rate (combined with taxes on wages) is less than their personal income tax rate (which can go as high as 39.6%). In the past, there hasn’t been much debate on C-Corp election, but the new law has given some businesses pause to think and do some math to determine their corporate status.
Likewise, many business owners who functioned as a sole proprietor will want to consider forming a company and electing S-Corp status in 2018. “S-Corp” is a tax classification where the business owner elects to pass business income through as his or her personal income. Under the new legislation, these owners are due a 20% tax deduction on qualified business income – a massive tax break – that surely should incentivize small business chiefs to take a strong look at incorporating. Some service industries are excluded from the deduction, but only if income exceeds certain caps (e.g. $315,000 for joint filers). Smart planning can ensure that business owners take advantage to lessen their tax burden one way or another.
There have always been advantages to forming a corporation or LLC; the benefits just haven’t been flashy or outwardly incentivizing. Now, however, all small business operators have a serious incentive in the form of tax relief to consider when electing whether to incorporate. Prudent owners should meet with their accountants and attorneys to determine which corporate form is best for their situation—and similarly which tax election best promotes their business. The Tax Cuts and Jobs Act was designed with you in mind. It will create more startups and allow existing businesses to invest or hire more employees. We’re all enjoying a strong economy. Our area is already seeing a lot of growth and development on the onset of these tax reform measures. If you are a small business owner, or thinking about starting a business, now is the time to take advantage and watch your business bloom.
Adam G. Breeding is the managing attorney at Lake Norman Law Firm, located at The Plaza at 131 Main in Cornelius. Business law and corporate formation are among Lake Norman Law Firm’s practice areas. You may contact them at 704.765.1617 or at www.lknlawfirm.com.