Business Taxing You?
By Bev Day, MBA, CFE
Published in SpeakUp! 2001
speakers, you focus on presenting programs. You market, speak, collect
fees and pay taxes. But there’s more … especially to
the “pay taxes” part.
How can you lower your taxes? Have you ever considered organizing
your business into a formal entity, but didn’t know where
to start? Answering these questions helps you make productive decisions
for your future.
the Right Advisor
Though speakers have businesses similar to one other, they realize
different outcomes due to product income and fee levels. In the
same way, one type of organization or business entity doesn’t
fit all. To find the right one for you, seek a tax or financial
advisor who will discuss a variety of options with you. Here are
some basics to know when it’s time to interview financial
Start by exploring the benefits and legal requirements of various
business entity types (see chart). And don’t wait until the
day before you need it (i.e., when taxes are due) to rush out and
form one. Think ahead to what your business will look like in five
to 10 years. Determine your products, income level, medical and
retirement needs, etc. Then go for the right type of entity to meet
tomorrow’s needs. As you consider options, resolve to keep
as much money as you can. (I am talking about tax reduction, not
I recommend you select from these four entity structures: sole proprietorship,
limited liability company (LLC), C corporation or S corporation.
I do not suggest forming a partnership because of potentially being
liable for the acts of your partners. Stick with an LLC or a corporation
A sole proprietorship is formed and operated by an individual. It’s
easy to do; however, the proprietor is personally responsible for
all business losses and liabilities. Breach a contract or make a
mistake and you could lose your home. It’s usually best to
form an entity that has limited liability.
A limited liability company (LLC) – a relatively new hybrid
– provides the limited liability benefits of a corporation
and pass-through tax treatment benefits. That means the company’s
income, deductions and tax credit items are “passed through”
to members who report the profit or loss on their individual tax
Form 1040. All income could be subject to self-employment tax, e.g.
Social Security and Medicare. It’s a versatile option; you
can form an LLC and be taxed as a proprietor or elect to be taxed
as a corporation.
A C corporation, a regular corporation, is a separate legal entity
apart from you. Since a corporation lacks the ability to think for
itself, it has officers and directors – you. As an officer,
you are also an employee. As a stockholder, your liability is limited
to the capital you have invested in the purchase of stock. The C
corporation has the greatest number of tax deduction options of
the entities described here.
An S corporation is a regular C-type corporation that must meet
specific requirements to qualify for and be granted the Small Business
Corporation status by the IRS. The S corporation offers limited
liability status and the pass-through tax benefit.
these essential factors. Does your business have potential risk
and need liability protection? How does the entity best minimize
your tax burden? Can you handle the increased cost of formation
and required record keeping? Does the entity provide for both short-term
and long-term goals? What happens to the entity when you retire,
die or sell the business? Do you need a pension and medical benefits?
Review the chart to compare entity characteristics.
These are a few of many considerations to remember as you move forward
with your entire business organization planning.
• Your income is high. Select C corporation status when your
income is high or on the rise.
• Your business has losses in the beginning. If your business
will have losses in the start-up phase, form an S corporation, since
losses can generally pass through and be deducted against your personal
income. When you become profitable, you can convert to a C corporation
if that fits your entire plan.
• You pay higher taxes as a personal service corporation.
If you choose to be a C corporation, you are likely to be considered
a personal service corporation since you provide a service. Most
C corporations are taxed at graduated rates from 15% to 39%. Most
personal service corporations are taxed at a flat rate of 35%. One
way to avoid this tax treatment is to have the corporation pay out
most or all of its earnings in the form of salaries. As long as
you do not run afoul of the rules of reasonable compensation, you
can reduce the company’s taxable income in this way.
• You have a large product line. If you sell a large volume
of products, consider forming more than one business entity. Set
up a C corp for your product line and run your speaking business
through an LLC.
• Reduce payroll taxes in an S Corporation. Rather than paying
yourself a salary for all the taxable income generated by the corporation,
pay part in salary and take the rest in a distribution. This way
you reduce your Social Security and Medicare taxes. Just make sure
your salary is not too low; your salary must be reasonable in the
eyes of the IRS.
current business organization may hinder you from taking full advantage
of the tax laws. Actually, the tax laws may be taking advantage
of you! So establish the right entity for your type of business.
You will save on taxes, enhance your income and secure your financial