What Can Your Entity Do for You?
From LLCs and partnerships to CICs and ESOPs, understanding which business entities serve your purpose is critical for tax efficiency and asset protection.
There are many types of entities. Each entity has purpose and boundaries which may be unique. In addition, there are often synergies between entities and strategies, making each one more powerful when used with another. Regardless of which entity is used, it should serve your purpose both short term as well as long term.
This is not to say one entity is always better than the other; however, one entity may allow you to accomplish your objective more effectively. The benefits expand from simply running a business to asset protection, capital preservation, taxation, ownership, transfer of assets, future sale or gifting, philanthropy, and more. These decisions affect the business owner, partners, employees, key employees, as well as future generations.
Key Questions About Your Entities
- What is my objective?
- What are the restrictions of this entity?
- What are the boundaries?
- What are the benefits and/or liabilities?
- How is it taxed?
- Is it flexible?
- What is the ownership?
- Begin with the exit in mind?
Each of these questions should be asked in the context of both short-term and long-term planning.
Entity Types Every Business Owner Should Consider
LLC — Provides a level of legal protection along with tremendous flexibility. A business owner has the flexibility to be taxed either as an S Corp or a C Corp, a partnership, or a disregarded entity.
Partnership — A legal form of business operation between two or more individuals who share management and profits. Partnerships are the most flexible structures and provide tax efficiency including non-qualified, incentive-based plans for executives and key employees.
S Corp — The advantages have included being a flow-through for tax purposes. This still may be the case; however, many business owners are structured this way when another option may be more efficient and beneficial to their purpose.
C Corp — Traditionally, many business owners have shied away from this entity because of "double taxation." This may be the case, but where dividends are not contemplated, the 21% corporate tax rates represent a 19% savings over flow-through entities, and also benefit from tax-free dividends to/from other C Corps.
QSBS (Qualified Small Business Stock) — Sometimes referred to as Section 1202, this is an election that some qualified C Corps may elect which puts them in position for a tax-free exit. When a qualified small business sells, the outcome is significant and tax-free — specifically the greater of ten times basis or $10 million.
Trusts — The diversity of trusts, asset protection, philanthropic, estate and gift tax efficiency, and succession planning require the expertise of legal counsel. Charitable trusts, revocable trusts, irrevocable trusts, and generation-skipping trusts each have unique purpose.
CRUT (Charitable Remainder Uni-Trust) — This particular type of trust serves multiple purposes and is created when a real estate sale or pending sale of a business is anticipated. Benefits include philanthropy, lifetime income, tax deductions, and tax deferral.
CIC (Captive Insurance Company) — First, last, and always, the purpose of this entity is insurance. As an insurance company, the CIC must be structured as a C Corp. Over time, the flexibility of this entity is unmatched. This entity is the catalyst when working with additional entities while protecting the operating company.
ESOP — An employee stock ownership plan allows the owners to sell stock of their company, typically a C Corp, to their employees either partially or fully. The owners profit immediately through tax efficiency of tax-free proceeds and proper tax deductions, with multiple additional benefits including employee retirement and continued control of the operating business.
Please consult your qualified accountant or legal counsel regarding proper structuring of these entities. Not all businesses qualify for potential use of these entities.