Small business owners and startup entrepreneurs sometimes engage us before these decisions are made to ensure informed effective decision making.  However, the majority have already established how they are operating their business without understanding how their entity type or lack thereof impacts how taxes are handled and filed.

At a very high level, anyone can start a business and receive payment as a sole proprietor at first and they are then taxed as an individual taxpayer.  Then you might decide to establish a Limited Liability Corporation (LLC) for any myriad of reasons, however too often these business owners may not realize the LLC is viewed as a pass-through entity for tax purposes by the IRS.  When deciding when to change to the LLC model, seek legal and tax professional advice and understand the differences.

Eventually, you may hear about S-Corp election to change the status of your entity for tax purposes and to start paying yourself on payroll.  Again, there may be tax advantages with this approach, however the actual opportunity to lower your tax liabilities is dependent on your revenue, the amount you choose to pay yourself and many other factors.

Insight: Determining when to leverage entity formation, the type of entity, the tax implications, and more, seek professionally licensed expert advice to both protect your business and ensure you only pay the taxes you are required to.

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