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7 Myths About Choosing a Business Entity

Business Entity Structure / Business Finances / Legal Agreements / Save on Your Taxes / Starting Your Business / Unexpected Business Risks

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 posted 7 myths that could get in the way of selecting the best business entity:

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.

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, and helps small business owners avoid a double taxation issue.

Corporations provide better asset protection than LLCs.  It is not the entity itself that provides asset protection, it is the procedures 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”.

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.

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 it’s reasonable, your company is not at a greater risk for an audit.

Sole Proprietorships are a bad idea.  Actually, this could be the ideal structure if you’re just starting out.  Once your business becomes viable and starts to grow, you can look at other entities.  If you have partners or investors, however, a sole proprietorship is not the best entity for you.

Using an online service to set up my business will save time and money.  It’s tempting to think 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, so should be chosen carefully with input from a Creative Business Lawyer™.  Don’t be penny wise and pound foolish when choosing a business entity for your new venture.

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