Is your business structured properly? How to tell
As a business owner battling 1,000 other things, figuring out when to make the move to an LLC or S-Corp is just another thing on the list that makes you want to reach for glass of pinot.
However, this decision can be made by answering just a few questions, so put down the wine and get ready to put a little checkmark next to this to-do item.
First, though, you need to know this little knowledge nugget:
As a single-owner business, your business structure is only important to 1) mitigate your liability and 2) decrease your tax liability.
What do those mean?
Mitigating your liability. This is fancy talk for “decreasing the amount of stuff someone could take from you should you get sued.” Under some business structures, you protect your personal assets (i.e. your house, personal checking account, vehicle, etc.) from being taken from you should someone sue you as a business owner and win. In those circumstances, only business assets can be collected, so all of your personal assets will stay intact.
Decreasing your tax liability. AKA lowering the amount you need to pay in taxes each year. By simply taking advantage of some of the tax loopholes in the system, you can save thousands by just choosing the right business structure.
Once you figure out where you are in the “business game,” figuring out your business structure is easy. Here are the questions to ask yourself:
IF THE ANSWER TO ANY OF THE FOLLOWING ARE “YES,” YOU SHOULD BE AT LEAST AN LLC.
DO YOU HAVE MORE THAN $10,000 IN PERSONAL ASSETS?
When you have significant personal assets, you want to ensure they are protected. With an LLC, your personal assets are protected as individuals can only go after your business assets in the event they sue you.
Note: The $10,000 is just a guideline – even if you have less, if you want to protect those assets, set yourself up as at least an LLC.
ARE YOU IN A SUE-HAPPY INDUSTRY?
If you’re in an industry where people are likely to sue (e.g. your specific services or products can cause damage, whether physically, mentally, or financially), it’s smart to set yourself up as an LLC to, again, protect your personal assets.
ARE YOU BRINGING IN REGULAR INCOME AND SERVING MULTIPLE CLIENTS?
Having a full-fledged “business” means you’re interacting and servicing more clients, and with more clients comes a greater chance of someone bringing litigation against you, no matter what industry you’re in.
If you’re bringing in regular income, you want to be at least an LLC.
IF THE ANSWER TO THE FOLLOWING IS “YES,” YOU POTENTIALLY SHOULD MOVE TO AN S CORP.
DOES YOUR BUSINESS PROFIT OVER $60K PER YEAR?
With an S Corp, you can get significant tax savings on the profit in your business if you fit the criteria. The reason for this is that all of your profit is essentially free from self-employment tax, or the ~15.3% you get charged as a sole proprietor or LLC to cover Social Security and Medicare.
However, it does come with some catches, like more paperwork and the requirement to pay yourself a reasonable salary. Thus, I would always suggest consulting your CPA before making this jump so that you can see if it’s right for you.
These are just guidelines and not meant to be a catch-all for every business. I highly suggest you consult your CPA with questions on your specific situation before proceeding with a move in business structure.
However, this should arm you with enough information to have that discussion.
How many of you have had a positive impact by switching business structures?
