New business owners must weigh the pros and cons of the choices they make when it comes to choosing the right business entity for a new enterprise. Entrepreneur recently reported on seven myths that could get in the way of selecting the best business entity for your small business.
Myth No. 1: An LLC saves taxes. The limited liability company (LLC) is designed to provide asset protection, not provide tax write-offs. This structure is best for holding assets or for governing partnerships between owners or other corporations.
Myth No. 2: A C-corp helps small business owners save taxes. C-corporations are for very large entities that require the unique structure this entity provides for tax deductions, many of which don't fit a small business owner. An S-Corporation may be a better choice for purposes of simplicity, and helps small business owners avoid the classic double taxation issue that comes with C-corporations.
Myth No. 3: Corporations provide better asset protection than LLCs. It is not the entity itself that provides asset protection, it is the procedure that must be followed—i.e., following strict corporate guidelines, avoiding the comingling of funds, maintaining good corporate records—that creates the protective "corporate veil." Corporations provide the same asset protection as LLCs when it comes to protecting personal assets from business liabilities as long as in either case, the business owner follows the proper procedure.
Myth No. 4: Setting up a Nevada or Wyoming Corporation will help save taxes and protect assets. Your company will be taxed on its profits by any state where you do business. And if your home state requires you to register your company there, your state's laws will govern asset protection. And, if you don't do business in Nevada, Wyoming, or any state where you set up your business, you will pay an additional registration fee in the states where you actually conduct business, which sometimes can be more expensive than setting up the business in that state to begin with.
Myth No. 5: S-corporations face a larger risk of being audited by the IRS. Small business owners using an S-corp do not have to pay self-employment taxes, but that doesn't mean the IRS is any more focused on S-corp owners. As long as you pay careful attention to your payroll allocation each year to ensure you are paying yourself reasonable wages for the work you perform, your company is not at a greater risk for an audit.
Myth No. 6: Sole proprietorships are a good idea if your business is small or new. No matter how new or how small your business is, chances are you don't want your personal savings, your retirement, or anything else you personally own to be taken by someone who makes a claim or files a lawsuit against your business. You need the "corporate veil" protection afforded by LLCs and corporations if you desire to protect personal assets from business liabilities. This is especially important if you have partners or investors, otherwise your personal assets are on the line not just for your business liabilities but for theirs as well.
Myth No. 7: Using an online service to set up my business will save time and money. It's tempting to believe you can set up your business online for a few dollars, but choosing the right entity can save you thousands in taxes and administrative costs. It's not just the legal documents that count, but trusted advice from someone who knows the ins-and-outs of how to select the appropriate entity given your special circumstances. Don't be penny wise and pound foolish when choosing a business entity for your new venture.
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