7 Misconceptions When Choosing Your Business Entity

September 29th, 2015 at 12:13 PM

There are many issues to consider when choosing the right business entity, its not just researching on the internet for an hour…

Here are a few myths that you may consider.

1. An LLC will save me money-WRONG. The Limited Liability Company was designed for asset protection. LLC’s are best used for holding assets and partnership relationships between individuals or other corporations. LLC’s can elect to be taxed as an S Corporation or C Corporation, however you do not need an LLC for any specific tax write-offs, and they will not provide any additional tax savings.

2. A Corporation will provide tax savings as a small business owner. WRONG. This strategy is incorrectly recommended across the country by promoters who claim that the Fortune 500 companies are C Corporations and provide more deductions. I always run the numbers will my clients to ascertain what the best form of entity is for their special set of circumstances.

3. A Corporation provides better asset protection than an LLC. WRONG. Myths prevail on either side as to the asset protection advantages. The truth is that the corporate veil and the protection it provides is a legal concept applies uniformly across the country under statues and years of case law. True asset protection is a matter of following corporate procedures, not commingling funds, using the company name on all documentation and acting responsible in the management of your company.

4. A Nevada or Wyoming Corporation will save me taxes and better protect my assets. WRONG. This is one of the biggest scams in the business. Here the deal–if you are doing business in your home state, or any other state for that matter, that state is going to tax you on the profits–and that state’s laws will govern the asset protection. That being said, there are unique instances where incorporating in these state might make sense.

5. The IRS highly audits S-Corporations for salary allocations. WRONG. Yes, you need to carefully consider your payroll allocation each year to make sure its reasonable. However, do not be concerned that the IRS is hyper focused on S Corporations, and their unique tax advantages.

6. A Sole Proprietorship is always a bad entity. WRONG. Again, I always run the numbers to make the proper decision as to the right entity for clients. Yes, sometimes the sole proprietorship is the best choice due to medical reimbursement plan of employment of their children as important considerations.

7.Online company formation services will save me time and money. WRONG. Choosing the right entity to operate your business can save thousands of tax dollars each and every year, legally, with the proper guidance. By using an online service, you are disqualifying yourself from the advice of an experienced professional.