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Article:

Is Your Business Taxing You?
By Bev Day, MBA, CFE

Published in SpeakUp! 2001

As 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.

Find 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 advisors.
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 tax evasion.)

Four Business Structures
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 instead.
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.

Consider 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.

Guidelines for Choosing
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.

Your 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 future.



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