As the economy slowly begins to recover from COVID-19 lockdowns, I talk with small business owners who are rethinking their business model. Now, more than ever is the time for all small business owners to engage in a new kind of planning; new ways of monitoring and projecting cashflow; including new models of business. Thinking outside the box - and planning differently - are the keys.
One way to evaluate your business model is to go back to your original business plan and revisit your decision about business entity. Here is a review of the available business structures:
A sole proprietorship is the most basic of the business structures. You can choose this option if you are running the business by yourself, without partners. Sole proprietorships are easy to form, and they don't have complicated tax codes that can give you headaches. In fact, your business taxes will pass through to your personal taxes.
You also don't have to file much paperwork to form a sole proprietorship. While this entity has many benefits, it also has a serious drawback. If you form a sole proprietorship, you won’t have any liability protection. In other words, your customers can sue you. Your business structure will not protect you.
Partnerships are the next step up. These are very similar to sole proprietorships, but instead of running the business by yourself, you will run it with a partner.
For those who want to create an entity that is separate from the owners, consider a limited liability company (LLC) which is one of the most popular entities for small businesses. You can open an LLC if you are working by yourself or with partners. In fact, there aren’t limits regarding the number of owners.
The LLC owners are taxed similarly to a sole proprietor or a partnership. Your profits and losses are recorded on your personal tax forms. Since your personal assets and business debts are separate with an LLC, you have protection from lawsuits.
If you choose to structure your business as a corporation, then it is important that you understand the differences between an S-Corp and a C-Corp. There are advantages to both of these types of corporations, and you need to consider the tax needs of your company. Both of these structures offer liability protection for shareholders, keeping the business assets separate from the individual assets.
You don't need to go from "before" to "after" without a plan and a process for rebounding. Let me know when you would like to talk. Your choice of business entity is critical for tax planning, particularly as you rebound from the pandemic economy. As planners, we are here to assist you in navigating simple solutions.
Stay safe, stay well, and stay tuned,
Charles and the Myrick CPA Team
Charles P Myrick CPA, Washington DC tax preparation firm, specializes in accounting services for small business start ups and entrepreneurs. If you are a new entrepreneur, give us a call. We invite you to learn more about the small business accounting services that are available: (202) 789-8898.