Entity Structure Issues

This session of Starting a Business and Keeping Records will be devoted to aligning forecasted growth with the optimal entity structure and related external compliance requirements. Understanding the marginal income tax rates for individuals helps entrepreneurs see when a corporate tax rate of 21% is less than the taxpayers' marginal tax on Schedule C earnings from self-employment. If taxable income is expected to consistently exceed $50,000 and the business owner plans to reinvest profits in future growth (eg machinery and equipment purchases), consideration should be given to filing a corporate election.

Sole proprietors and disregarded entities pay an additional self-employment tax of 15.3% on all earnings and profits up to $160,000 until and unless a corporate election is filed. Owners who file a corporate election on Form 8832 or 2553 are required to pay self-employment tax only on "reasonable compensation" portion of their earnings which can lead to significant tax savings.

Choosing the right entity structure and setting up a payroll solution are investments of time and money that set a solid foundation for sales growth and profitability, however, business owners should carefully evaluate the additional costs of a payroll service and other corporate compliance requirements before making a corporate election.

I will also discuss my first book publishing effort: Starting a Business--Entrepreneurship, Business Process and Entity Structure Issues and save some time at the end of the session to address any participant questions.

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