What kind of entity should I form?

16 July 2013 / Video Blog / Comments Off on What kind of entity should I form?

Welcome to another edition of Tuesday Tidbits, where we make tax and accounting simple. I'm your host Charles D. Shapero CPA, with Widget Bookkeeping and Tax and today we're going to talk about when you form an entity: S Corp or LLC? You really need to go talk to your CPA to find out what your personal situation warrants As far as the legal protection every lawyer I've ever talked to says that the LLC and the S-Corp convey almost identical legal protection, so really it comes down to an accounting and tax decision. Here are some guidelines on what we should think about: Are you going to have debt in the entity? You can deduct losses in an LLC, easier than an S-Corp if you're going to have debt, so that's one consideration What type of activity are you going to have in this entity? Is it an ordinary income activity, where self-employment tax is a concern? The S-Corp might be a better answer. Because LLC's still convey self-employment tax. Is it a rental? Are you going to be holding real estate in this entity? Real Estate is almost always held in an LLC, because you can pull property in and out of an LLC with no tax. With an S-Corp if you try to pull a piece of property out of an S-Corp, you're going to be taxed on the fair market value increase in value while that S-Corp held that asset. Another factor would be are you going to give ownership stake to your employees? Or maybe to your kids one day. With an S-Corp if you convey S-Corp stock to one of your employees you're going to have to add that to their W-2, an LLC you can do that as well, or we can structure it so that it's not a taxable event for your employee or for your children. Are you going to have any foreign partners? There are several restrictions on the S-Corp and who can own it. If you're a foreign individual, in other words non-US, you can't even own an S-Corporation, so you may be forced to go to the LLC route. I would highly recommend you meet with your CPA to discuss your personal situation to find out which is right for you. That concludes this Tuesday Tidbit, see you next Tuesday! Widget Bookkeeping and Tax Know more, keep more.

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