February 24, 2012
TO:Small Business Owners
DATE:February 24, 2012
SUBJECT:Choosing the Right Business Entity
Enclosed is the Justification Report covering information related to different types of entities that could be chosen to establish a business. Furthermore, the report explains in full details the advantages and disadvantages of each business entity, and how those factors could fulfill the needs of each particular individual.
To ensure that the right structure is selected, I will be glad to further discuss the details with each one of you, in case that you have any questions.
TABLE OF CONTENTS
A. The Problem: Higher tax rate with the wrong entity
The Method Used
A. Sole Proprietor
Sub-Chapter S Corporation
Limited Liability Company
Conclusion: All Business Owner Have Their Unique Findings for their Right Entity *
When starting a business is very essential that the correct business entity is chosen to properly plan for a lower tax bracket. Many small business owners are clueless when it comes to choosing the correct entity structure for their business. In this report we will analyze the pros and cons of three (3) different entities that favor the small business owners. We will get into details as far as to receiving refunds from the Federal government in order to help ease the startup cost of the business.
The Problem: Higher tax rate with the wrong entity
Many ambitious small business owners have to decide to choose from business entities such of sole proprietorship, partnership or corporation. The main issue with the wrong selection of an organization structure is that of a higher tax rate --a higher tax rate that could bring you either success or failure.
A decision to opt for the correct entity could be an easy task for many, but a time consuming and difficult duty for others. This decision is unique to everyone; therefore, making the right choice could be very difficult.
The second most important issue with choosing the correct entity is that of liability for the owner or owners. Having an entity structure that protects the owner’s personal assets is essential for the business owner. It is difficult enough to not only lose capital from the business, but to allow a liability where your personal assets could be taken, as well.
The Method Used
The main method used to analyze the best entity to choose was primarily the comparison of the three (3) different entities. The pros and cons of each of them will give us a better understanding as of which one is the correct entity for a particular person.
* Easy and inexpensive to start. As easy as filing a trade name with the county or city where the business is situated and inexpensive as a trade name filing for around twenty dollars ($20). * Easy to change to a different entity for better tax benefits. * Easy to close its doors if the business does not go as planned.
* Unlimited liability to the owner’s assets.
* Finding funds from potential investors will be difficult with this entity since the liability portion tears away investors. * Less attractive to prospective employees.
* Business profit is taxed first with self-employment tax, and then with a regular taxation. If the business is generating over fifty thousand dollars ($50,000) in profits, one should never choose this entity especially when the taxpayer does not have any dependents under the age of...