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Tax Law: When Forming a Business Entity, Consider the Tax Implications

Posted on in Small Business Taxes

If you have a business-whether it's a single-member outfit you run out of your garage or a large organization with dozens or even hundreds of employees-you will eventually come to the question of whether you should form a business entity such as a corporation or LLC.

Doing business as a corporation or LLC makes sense for many reasons, not the least of which is the liability limitation that protects you as an individual from having to pay for any issues that arise out of the operation of the business. Still, when it's time to create a business entity, you will need to consider the various tax implications of each.

You should speak with an experienced attorney who knows tax law in order to fully understand the different types of tax exposure each entity can bring with it. For example, although operating as a corporation will protect you from being sued personally for the negligent acts of the corporation, doing so can expose you to double taxation: the profits of the corporation are taxed at the corporate rate, and then whatever pay you take out of the business is taxed at your personal income tax rate. On the other hand, if you operate the business as an LLC , the income of the business passes through to you and is only taxed once-at your personal income tax rate, which is typically far lower than the corporate income tax rate.

Contact us for a deeper discussion of the various business entities, and how each one affects your tax rate.

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