As an entrepreneur, you want to spend as much of your time in front of your clients or developing your business. You also need to pay attention to the finances and structure of your business is organized. That is, minimize taxes and protect your assets. Charlie Dombek from SlashYourTaxesToday has valuable advice for small business owners to consider for their taxes and asset management.
Note: Because every business has unique financial assets, funding and expenses, we can’t possibly account for all situations. The advice discussed below is a great topic to discuss with a certified tax professional. Since we look out for entrepreneurs, we wanted to inform you about this useful information.
When started a business, you probably didn’t think about all the semantics of taxes, entity structures or even legal liability. Most entrepreneurs focus on building a great idea and growing it – not hassling with red tape. It may be a good time to consider how your business is funded and how assets are managed.
Charlie shared that businesses should generally operate as corporate structures. A corporate structure can be either a “C” or an “S” Corporation or as a Limited Liability Corporation (LLC).
- The decision on whether to use a C or an S corporation is primarily tax-driven. They both provide the same level of legal protection.
- An owner can organize LLCs in several different ways. You elect how to treat that entity from a tax perspective. So, you can elect to treat it as a corporate structure — either a C or S — or as a partnership structure. It can also be disregarded for tax purposes, which means it’s a single-member entity.
In most instances, owners should structure their small businesses as an S-Corporation because that gives the highest level of legal protection along with a favorable tax environment. It’s recommended that investment assets should be held in a different type of structure; generally, this is in the form of a partnership.
Here is an example of a dental practice small business:
Typical Small Business Example
Here’s an example of how we put it all together for a typical small business owner.
We want to use either an S Corporation or an LLC taxed as an S Corporation for the small business.
If the building is owned by you or operate your business from, that physical piece of real estate should be held in a partnership LLC. You don’t want to own it individually because of the risk associated with owning investment real estate in your own name.
If you have residential rentals, an owner should separate this from other investment assets. If there are significant amounts of brokerage or safe assets, they should be held in their own structure.
With this type of structuring, you can enjoy iron-clad asset protection.
The big plan is to integrate your small business asset (and risk) management with your overall estate plan. Normally, your estate plan is going to consist of revocable living trust. If you’re married, the revocable living trust gives you a $7 million-dollar exemption from estate taxes. I think if you ask around, you’ll find that for most people, that’s adequate estate planning.
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Depending on your personal circumstances, other factors may be in consideration. Keep in mind that this is just a snippet of the possibilities to manage your assets and even limit your taxation on your small business. To learn more, check out the Webinar that Charlie Dombek did for Infusionsoft customers on how to slash their small business taxes.
