TAX BREAK

Choosing a Business Entity by Rebecca L. Maahs

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but some portion is retained to provide working capital or to acquire capital assets. By comparison, income of an S corporation is not subject to self-employment tax, rather only the amounts paid out by the S corporation as compensation are subject to employment taxes. Thus,

if income is accumulated in the business or is paid out as dividend, it is not subject to employment tax; provided, however that all entities and employers are subject to reasonable compensation rules of the Internal Revenue Code. This treatment can provide substantial tax benefits and can be of importance to some businesses and not be of much concern to other businesses.

 

In conclusion, LLCs have some advantages while S corporations have other advantages. The form of business entity that is "best" for your particular business will depend upon which of these "advantages" is deemed most important. For example, if you anticipate having investors with differing tax and cash needs and who may be contributing appreciated property over time, an LLC may be the best choice. Likewise, a business generating losses will generally yield more advantageous tax consequences if operated as an LLC rather than an S corporation due to the basis rules. On the other hand, if you do not expect to bring in outside investors, and expect the business to generate large amounts of income, the employment tax advantages of an S corporation may make that form of entity the best choice.

 

 

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