Why Forming a Pass-Through Entity Can Make Sense For your Business

Irvine business attorneys can provide help in determining how best to structure your business. There are many different options for business entities, including operating as a sole proprietorship, a partnership, a Limited Liability Company (an LLC), a Professional Corporation (PC), or a C-corp or S-corp. 

Some of these different business types, like LLCs and S-corps, are considered to be pass-through entities. Pass through entities can have significant advantages for company owners and those who are starting or growing their business should carefully consider those advantages as they make a choice about how their business should be structured.

Brown & Charbonneau, LLP can help your business to evaluate different entity types to decide which is right for you, so give us a call today to find out how we can help.

Why Forming a Pass Through Entity Can be A Smart Choice

The key feature of a pass through entity is that profits and losses are declared on the tax returns of company owners and owners pay the taxes. This is distinct from a C-corporation where the company pays taxes on its profits and declares its losses on its own tax returns.

A few of the key advantages of pass through entities include the following:

• Avoiding double taxation: When you form a C-corporation, the business pays taxes on profits. When the company shares profits in the form of dividends or when company owners sell shares of company stock, the individuals who received the dividends or who benefitted from the company’s increased value also pay taxes.  This essentially means that profits from the company are taxed twice — once when the company pays and once when individual owners pay. This is avoided when a business is organized as a pass-through company. Owners of S-corps and LLCs get many of the same liability protections as C-corp owners, without worrying about double taxation.
• Tax reductions: The tax reform bill passed in December establishes a 20% tax deduction for income from most pass through businesses. While there were some restrictions put in place on this deduction for those in service businesses, such as doctors or lawyers, if you’re in a service business and your income is under $157,500 for single filers or $315,000 for married filers, you can still deduct the first 20% of S-corp income and will not have to pay taxes on it, as CBS News explains.
• Tax flexibility: When you operate as a pass through entity, you have flexibility regarding how you earn income from the company. If you are not only a co-owner but an active manager of the business, you will need to pay yourself a reasonable salary in order to avoid potentially triggering tax penalties from the IRS. However, you can also pay distributions from company profits and, depending upon the circumstances, you can receive a large part of your income as distributions rather than as wages or salary.  This can save you money because you do not have to pay Social Security or Medicare taxes on the money that you receive as distributions.

There may also be other benefits associated with operating as a pass-through entity, depending upon the specific circumstances. You should carefully evaluate your different options regarding the types of business entities that you could choose to structure your business as.

You can weigh the pros and cons of forming a pass-through entity compared with other types of business structures so you can ensure that the right decision is made for how your organization should operate. It’s often best to get legal help in making an assessment of how your company should be structured so you can consider financial and legal issues that may arise as a result of business operations.

Getting Help from Irvine Business Attorneys

Brown & Charbonneau, LLP can help you to understand what types of business entities are considered pass through entities and can assist you in determining if forming a pass through entity is the right choice for you. Our legal team can also help you to go through the process of forming a pass through entity, which could include incorporating or filing other paperwork with the state and with the IRS.

To find out more about how Irvine business attorneys at our firm can help you to form the business entity that is right for you, give us a call at (866)237-8129 or contact us online today.