Category: Tax

February 26, 2025 | by Atherton & Associates, LLP

Small business owners tracking their compliance obligations now have a new date to mark on their calendars: the Financial Crimes Enforcement Network (FinCEN) has announced March 21 as the revised deadline for most entities that must file Beneficial Ownership Information (BOI) reports under the Corporate Transparency Act (CTA). This announcement follows a series of legal challenges that briefly halted the filing requirement, only for the courts to lift the injunctions and revive the law. Below is a detailed overview of how the CTA and its BOI reporting rules affect small businesses, along with steps to prepare for compliance.

Understanding the Corporate Transparency Act (CTA) and Beneficial Ownership Information (BOI)

The Corporate Transparency Act was passed to bolster anti-money-laundering measures in the United States by collecting specific information about the real people who ultimately own or control certain small businesses. Although large entities usually have existing disclosure obligations, the CTA extends these requirements to smaller corporations, limited liability companies (LLCs), and similar structures. The goal is to prevent criminal actors from hiding their financial dealings behind corporate veils. However, small businesses find themselves at the heart of the CTA’s mandates, often due to limited awareness or resources to keep up with new federal filing obligations.

Under the CTA’s rules, these businesses must submit Beneficial Ownership Information directly to FinCEN, disclosing details about each beneficial owner. The CTA aims to make it more difficult for criminals to exploit shell companies, but it also places an administrative burden on many small businesses that have never before faced such federal disclosure requirements. Meanwhile, ongoing legal and legislative developments continue to shape the CTA’s enforcement timeline.

Recent Legal Developments and the New Filing Deadline

Background on Delays and Injunctions

The path to the current March 21 filing deadline was anything but straightforward. After the CTA became law, FinCEN initially set filing obligations to begin in early 2025 for most existing small businesses. However, in the wake of legal challenges filed in federal courts, injunctions paused the collection of BOI. The central argument in these lawsuits revolved around the reach of federal authority over small businesses, as well as concerns about potential privacy violations.

For a period, these injunctions meant that intended deadlines—such as January 13—were no longer in effect and businesses remained in limbo. The legal situation changed dramatically when courts lifted these injunctions, most recently through a case that granted a stay of a nationwide block on the CTA’s BOI reporting requirements. As soon as that final injunction was lifted, FinCEN reestablished a compliance window for BOI filings and pushed the overarching deadline to March 21. This new date applies to businesses that originally needed to file by early 2025 but were affected by the litigation delays. For entities created or registered on or after February 18, 2025, they must file their BOI report within 30 days of formation or registration.

Exceptions & Later Deadlines

Although March 21 applies broadly to the majority of small businesses, some entities have different timelines. If a company had already received a filing extension because of disaster relief or other circumstances, that later deadline remains valid. Businesses, for example, with an April 2025 extension should keep their previously assigned due date. Likewise, FinCEN has signaled it may further revise the deadlines if it determines that businesses need more time or if compliance can be prioritized towards higher-risk scenarios. Over the next 30 days, FinCEN will assess how to handle specific categories of small businesses that it believes pose lower short-term security risks.

Which Businesses Must File

Defining “Reporting Companies”

The CTA casts a wide net to cover most U.S.-based corporations, limited liability companies, and other similar entities formed by filing paperwork with a state authority. Many of these entities have fewer than 20 employees and might have minimal financial activity. Nonetheless, the law presumes these small businesses are potential vehicles for illicit financial activity if their ownership structures are not transparent.

There are exceptions. Sole proprietorships and general partnerships that have not registered with a state typically do not need to file, as they are not formed through the same formal processes as corporations or LLCs. Additionally, certain larger or more heavily regulated entities, such as publicly traded companies, generally already have robust disclosure frameworks and are outside the CTA’s BOI requirements.

Required Information

Reporting companies must disclose identification details for each “beneficial owner.” A beneficial owner is any individual who exercises substantial control or owns at least 25% of the business. The submitted information typically includes the individual’s full legal name, date of birth, current residential or business address, and a unique identifier (such as a passport or driver’s license number).

Additionally, for new entities formed on or after January 1, 2024, the CTA introduces the concept of “company applicants.” These are individuals directly responsible for filing the formation documents with a state, such as articles of incorporation. This provision expands the scope of required disclosures beyond just owners, aiming to identify those who set up new legal entities.

Steps Small Businesses Should Take Now

Gathering Documentation

Because the CTA calls for specific personal details, small business owners should begin by identifying all individuals who qualify as beneficial owners and confirming the accuracy of their information. Businesses that have multiple owners across various locations may find it takes time to collect the necessary residential or business addresses, dates of birth, and identifying document numbers. Having this data in one secure repository can streamline the filing process and reduce the chance of errors.

Even if there is a possibility that the filing deadline might shift, it’s wise to secure the documents well in advance. Proper planning will also help you recognize if your business structure creates any ambiguity regarding who holds “substantial control.” The sooner those questions are clarified, the easier it will be to submit correct information in case FinCEN issues any new guidance before March 21.

Filing the BOI Report

FinCEN provides an online system at BOIefiling.FinCEN.gov for submitting the required information. The agency does not impose any filing fee on businesses that choose to file directly through this platform, although some third-party service providers charge fees for assistance or on behalf of their clients. Businesses should be aware that they can handle the process themselves at no additional cost, especially if they have a straightforward ownership structure.

With the new March 21 deadline in mind, small business owners should file promptly once they have verified all details. For those that have obtained an extension beyond March, continue to observe the specific later filing date. Keep in mind that FinCEN has set a 30-day window in which it may further adjust deadlines. If you have formed a new entity but have yet to file, clarify whether you fall into any special categories that might extend your reporting date.

Potential Consequences of Non-Compliance

The CTA enforces its rules with considerable penalties designed to encourage timely, accurate reporting. Willfully failing to file a BOI report or submitting false information can lead to a fine of ~$606 per day, up to a maximum of $10,000, and the possibility of up to two years in prison.

Moreover, disclosing or using beneficial ownership information without proper authorization carries similarly severe punishments. FinCEN’s aim is to tighten anti-money-laundering compliance, and the agency has signaled an increased focus on ensuring that small entities do not slip through the cracks. Even if your business appears low-key with minimal revenue, you should not assume the CTA will overlook it. The high stakes highlight the importance of understanding the requirements and submitting information accurately and on time.

Upcoming Changes and Possible Relief

FinCEN’s Plans to Amend Reporting Rules

Although FinCEN is currently expecting businesses to meet the March 21 deadline (or a later extension date if granted), it has committed to reviewing its procedures within a 30-day window. One element of that review is determining whether smaller and lower-risk entities should have more relaxed reporting standards or extended deadlines. In the meantime, FinCEN wants to prioritize obtaining BOI from higher-risk companies that could pose national security concerns.

The potential revisions might include streamlined forms, reduced data entry requirements, or elongated timelines for businesses that have limited risk exposure. However, small businesses should remain prepared for the filing date at hand and not assume these potential modifications will relieve the compliance burden altogether.

Congressional Action

While the judicial arena has seen various challenges to the CTA, Congress is also weighing in with proposed legislation. One pending bill, known as HR736, aims to push the filing deadline for most companies to January 1, 2026. This would offer a significant reprieve for small businesses scrambling to gather ownership details. Another measure, the Repealing Big Brother Overreach Act, seeks to eliminate the reporting requirements entirely, arguing that the CTA places unnecessary burdens on small businesses.

Neither piece of legislation has become law, and their future remains uncertain. Whether or not they pass, small businesses must abide by the CTA as it presently stands. Some owners are hopeful that a legislative solution might reduce complexity or extend timelines, while others remain skeptical that any meaningful relief will arrive before the current March 21 deadline.

Best Practices for Compliance Preparation

With the CTA deadline approaching, businesses can adopt a few best practices to navigate the requirements effectively:

Act Early: Even though the possibility of extensions exists, gathering information and filing sooner rather than later helps reduce the risk of missing deadlines.

Monitor Official Channels: Keep an eye on FinCEN’s announcements and official guidance, particularly as it evaluates the need for further deadline extensions or modifications. Any postponements or amendments will likely be publicized promptly.

Seek Professional Guidance: Although many small businesses can file on their own, complex ownership structures, multi-state operations, or partial foreign ownership might require advice from an accountant or attorney. Engaging with professional services firms can ensure compliance and help you respond quickly to any changes.

As deadlines and legal rulings shift around the Corporate Transparency Act, one thing remains clear: small businesses shoulder significant responsibilities for disclosing ownership information. The March 21 deadline is now the central focus for most small entities, yet the CTA’s enforcement landscape remains fluid. If you own or manage a small business, preparation is essential. Compile accurate information about your beneficial owners, stay informed about any last-minute changes from FinCEN, and be mindful of potential legislative or judicial developments on the horizon. Though the CTA adds new tasks to your to-do list, prompt action and careful attention to detail will go a long way toward fulfilling your obligations and avoiding penalties.

This article is intended for general informational purposes only. It does not constitute legal advice or a substitute for legal or professional counsel. Businesses should consult qualified professionals to ensure compliance with the Corporate Transparency Act, FinCEN regulations, and any other relevant state or federal laws.

February 04, 2025 | by Atherton & Associates, LLP

The start of 2025 brings important federal payroll tax and withholding changes that every employer needs to understand. From updates to Social Security wage limits to adjustments in retirement contributions and tax withholding rates, these changes directly impact payroll management and compliance. 

To help you stay ahead, we’ve outlined the most significant federal updates for the new tax year and what they mean for your business.

Social Security Tax Withholding

The Social Security tax wage base has increased to $176,100 for 2025. Both employees and employers will continue to contribute at a rate of 6.2% on wages up to this threshold. This adjustment raises the maximum Social Security tax withheld from wages to $10,918.20 for the year. Medicare tax remains unchanged at 1.45% for both employees and employers, applicable to all wages without a cap. Additionally, an extra 0.9% Medicare tax is imposed on individuals earning over $200,000 annually; employers are not required to match this additional tax. 

Federal Income Tax Withholding

The IRS has released the inflation-adjusted federal income tax brackets for 2025. For single filers, the standard deduction increases to $15,000, while married couples filing jointly see an increase to $30,000. 

Although the marginal tax rates remain unchanged, inflation adjustments have shifted the income thresholds that determine which tax rates apply.

Federal Unemployment Tax Act (FUTA)

The FUTA taxable wage base remains at $7,000 per employee for 2025. The standard FUTA tax rate is 6.0%; however, most employers are eligible for a 5.4% credit for timely state unemployment tax payments, resulting in an effective rate of 0.6%. 

Retirement Contribution Limits

For 2025, the contribution limit for employees participating in 401(k), 403(b), and most 457 plans increases to $23,500. The catch-up contribution limit for employees aged 50 and over remains at $7,500. Notably, under the SECURE 2.0 Act, individuals aged 60 to 63 are eligible for a higher catch-up contribution limit of $11,250. 

Health Flexible Spending Arrangements (FSAs)

The annual contribution limit for health FSAs increases to $3,300 for 2025. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount rises to $660. 

Additional Considerations

Employers are reminded to obtain updated Forms W-4 from employees to accurately reflect any changes in filing status or personal exemptions. Additionally, the federal minimum wage remains at $7.25 per hour; however, employers should verify if state or local minimum wage rates have changed to ensure compliance. 

Navigating payroll tax changes can be time-consuming, but you don’t have to do it alone. Our team can help you stay compliant in the face of evolving tax regulations. If you have questions about how these 2025 updates affect your business, contact our office today. We’re here to provide the personalized guidance you need to keep your payroll processes running smoothly.

January 28, 2025 | by Atherton & Associates, LLP

If you own a business organized as a pass-through entity, the Qualified Business Income (QBI) deduction offers a valuable opportunity for tax savings. Under the Tax Cuts and Jobs Act, this deduction can allow sole proprietors, partnerships, S corporations, and some LLCs to deduct up to 20% of qualified business income. Unfortunately, as it stands right now, this provision is set to expire at the end of 2025, although some observers believe Congress may consider extending it.

Because there is an uncertain end date, it makes sense to consider strategies that could help you capture a larger benefit while it is available. The following guidance outlines important background information on the QBI deduction, along with strategies to help maximize your potential tax savings. 

QBI basics

Qualified business income is essentially the net pass-through income earned from an eligible enterprise, excluding wages or salaries. 

The QBI deduction is open primarily to non-corporate taxpayers, namely individuals, trusts, and estates, who receive their share of business income from pass-through structures. Businesses that are set up under C corporation status do not qualify.

Complicating this deduction are special rules for certain “specified service trades or businesses” (SSTBs). When you operate in fields such as health, law, accounting, financial services, performing arts, or consulting, there are significant limits or a complete disallowance of this deduction once your total taxable income exceeds specific thresholds. These thresholds vary by filing status and are adjusted annually.

Limitations and phaseouts

One of the primary hurdles with the QBI deduction arises when your taxable income before the deduction exceeds predefined thresholds. If you file jointly, your allowable QBI deduction starts getting phased out once your taxable income crosses a certain line, and for single filers or other filing statuses, there is a different threshold.

If you end up within the “phase-out” range, your ultimate deduction may be reduced. Once your taxable income shoots above the fully phased-out threshold, the deduction is eliminated. 

For instance, in 2024, business owners with taxable income below $191,950 could claim the full deduction. Those with taxable income over $241,950 can’t claim the deduction. If income fell between those two thresholds, the individual could qualify for a partial deduction. The ranges for married filing jointly taxpayers are $383,900 and $483,900, respectively.

W-2 wage and UBIA limitation

For business owners with income that exceeds the threshold, the QBI deduction is limited to the greater of:

• 50% of W-2 wages paid by the business and properly allocated to QBI, or
• 25% of those W-2 wages plus 2.5% of the original cost basis (unadjusted basis immediately after acquisition, or UBIA) of any qualified tangible property used in the business.

UBIA-based limitations help capital-intensive operations like real estate development, manufacturing, or hotels, where significant property investments support production. If you operate in a business with substantial depreciable property, you can potentially preserve a greater portion of the deduction, even when a lack of W-2 wages or high income levels otherwise threaten to limit it.

Rules for SSTBs

If you practice in fields such as health, accounting, financial services, legal services, performing arts, or consulting, you may be part of a Specified Service Trade or Business. SSTBs face additional, more stringent limitations. Once your taxable income exceeds the phaseout range for your filing status, the IRS disallows the QBI deduction for SSTB income altogether.

Strategies to increase your QBI deduction

Aggregate multiple businesses

If you own several pass-through entities, grouping them for QBI purposes can boost your deduction. By making an aggregation election, you can treat separate qualifying businesses as a single entity for purposes of calculating W-2 wages, UBIA of property, and QBI. 

This approach often benefits owners whose different ventures complement each other in terms of wages or capital intensity. For instance, one activity might have high income but a low W-2 payroll, while another might have low overall profit but a sizable payroll. Combining them can boost the total W-2 wage factor, which in turn mitigates the QBI limitations. However, be aware that you generally cannot aggregate an SSTB with a non-SSTB; any attempt to merge them for QBI purposes is disallowed. There are also ownership and business commonality requirements to aggregate multiple entities.

Be strategic with depreciation

Depreciating assets reduces your taxable income but it also lowers QBI. If you’re near a threshold where QBI limits kick in, making certain depreciation elections could preserve a larger deduction. Balancing immediate tax savings with long-term benefits is key here.

On the one hand, you may want a large deduction in the first year to lower your overall tax burden; on the other, you risk decreasing QBI to the point where your 20% deduction shrinks. This is especially tricky if your income hovers near the thresholds that tip you into a W-2 wage limitation zone.

Rather than automatically claiming the maximum possible depreciation in the current year, consider the trade-off. In some instances, spreading out depreciation via the usual MACRS schedule could preserve a more substantial QBI deduction in the year of purchase, and if your tax rates rise in the future, those postponed depreciation deductions could have greater value later. Deciding whether to fully claim, partially claim, or entirely forego bonus depreciation should be done carefully with an eye on optimizing your total tax liability, not just this year.

Optimize retirement contributions

Contributions to self-employed retirement plans reduce taxable income and QBI. While this can shrink your QBI deduction, it might still help if it lowers your income below the phaseout threshold. Be strategic about how much you contribute to ensure you’re getting the best overall tax result.

If your income is on the edge of a QBI threshold, a modest additional retirement account contribution might safely move you below the key figure that triggers QBI limitations. Each situation is unique, and you should weigh the long-term value of retirement savings against the near-term objective of maximizing your QBI deduction. 

It’s worth noting that contributions to a personal IRA generally do not affect QBI since they are not tied directly to the self-employed activity.

Optimize your entity structure

Your choice of business entity can have a big impact on the final QBI calculations. A sole proprietorship might provide simpler bookkeeping, but you could miss out on added W-2 wages if you do not pay yourself a salary as an employee (which is only possible in certain corporate structures like S corporations).

In an S corporation (or an LLC taxed as an S corporation), part of the owner’s earnings can be taken as wages (subject to payroll taxes), and the rest flows through as income that counts toward QBI. However, you are required to pay yourself “reasonable compensation,” which will reduce that QBI portion. Yet paying a salary in an S corporation can also position you to harness the W-2 wage threshold for the QBI limitation. 

If you run both an SSTB and a non-SSTB in a single entity, you might explore whether restructuring them into separate companies is possible and beneficial. Splitting them out could preserve QBI deductions on the non-SSTB revenue stream rather than letting the SSTB label overshadow the entire operation.

Manage taxable income levels strategically

There are numerous tactics to keep taxable income within the QBI-favorable range. Accelerating deductions or deferring revenue from year to year can help you manage your income. If you are nearing an important threshold, it can make sense to push some income into the following tax year or to pull forward some expenses (such as planned repairs or purchases) into this year.

For married individuals whose joint income crosses a crucial line, filing separately might yield a better QBI deduction for the spouse who operates the pass-through entity. Doing so, however, can backfire if it triggers other tax disadvantages, including the loss of certain credits or a reduction in itemized deductions. It’s important to run the numbers carefully. 

Ensuring compliance and avoiding audits

As with all tax matters, accurate recordkeeping is critical. You should maintain meticulous documentation of:

• Business income and expense allocations
• W-2 wage computations and disbursements
• Depreciation schedules, including any elected Section 179 or bonus depreciation
• Basis in qualified property for UBIA calculations
• SSTB qualifications or non-qualifications (ensuring you are categorizing your operations correctly)

Consult with a knowledgeable CPA to confirm that you are on track and maintaining audit-ready documentation. 

Navigating complexity: a balancing act

The QBI deduction can be a game-changer, but the rules are undeniably complex—especially for higher earners or those operating in Specified Service Trades or Businesses. Maximizing the deduction often requires balancing multiple factors, such as income thresholds, W-2 wages, depreciation decisions, and retirement contributions.

A seasoned CPA can help you evaluate your unique circumstances, weigh the trade-offs, and design a strategy that maximizes your deduction while ensuring full compliance with IRS regulations.

Don’t let this opportunity slip by. Contact our office to get the tailored advice you need to optimize your tax savings. Let’s work together to ensure you’re making the right moves now and for the future.

January 28, 2025 | by Atherton & Associates, LLP

For many small business owners, managing payroll taxes can feel like working a complicated puzzle. One wrong piece – a missed deadline, a misclassified worker, a record-keeping slip – and you risk penalties, audits, or employee dissatisfaction. By understanding the common pitfalls and how to avoid them, you can keep payroll taxes from becoming an unnecessary source of stress.

Common payroll tax challenges – and how to avoid them

Worker misclassification

Misclassifying someone as an independent contractor when they should be an employee can create serious tax liabilities. Employees require tax withholding and prompt remittances to the IRS and relevant state agencies, whereas independent contractors handle their own taxes. 

The distinction isn’t always crystal clear, and relying on guesswork can lead to penalties, back taxes, and legal disputes. To avoid trouble, consult the IRS guidelines on classification factors or consider filing Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) to get an official ruling. 

If you’re uncertain, it’s often safer to treat the individual as an employee or seek guidance from a CPA. Ensuring proper classification at the start can save you a world of problems down the road.

Payroll calculation errors

A small miscalculation like applying the wrong withholding rate or overlooking an overtime payment can quickly snowball into expensive corrections and frustrated employees. Manual processes are especially prone to human error, and even outdated software can cause slip-ups if it isn’t regularly updated. 

Streamlining your payroll procedures with reliable payroll software helps ensure accuracy by automating tax calculations and applying the most recent rates. Periodic self-audits, spot-checking a handful of paychecks each month, and double-checking that employees’ withholding certificates are up to date can also go a long way toward maintaining accuracy and avoiding painful back-and-forth with tax authorities.

Late or missed tax payments

With so many demands on your time, it’s easy to let a payroll tax deadline slip by. Unfortunately, the IRS and state agencies don’t forgive these lapses easily, and penalties and interest can accumulate faster than you might expect. 

The simplest solution is to set clear reminders and create a dedicated calendar for tax obligations. Consider putting funds aside in a separate account for taxes as you run payroll, ensuring you’re never caught short when payment is due. Even better, automate as much of the payment process as possible through your payroll provider, reducing the risk that a busy season or unexpected crisis will make you late.

Inadequate record-keeping

Shoddy or incomplete records make it difficult to prove compliance, especially if you’re audited. Missing W-4 forms, disorganized timesheets, or incomplete payroll ledgers complicate the process of resolving disputes and can lead to penalties if you can’t substantiate your filings. 

Commit to a consistent filing system that you maintain throughout the year. Regular internal reviews help ensure everything is where it belongs. Consider scanning paper documents for electronic backup and using payroll software that stores key records securely. When you keep everything organized and easily accessible, audits become less daunting, and day-to-day payroll management runs more smoothly.

Technological challenges and integration issues

Relying on manual methods or outdated tools increases the likelihood of errors and makes routine payroll tasks labor-intensive. You might also struggle if your payroll and accounting systems don’t “talk” to each other, resulting in inconsistent data and time-consuming reconciliation. 

Upgrading to modern payroll software that integrates with your accounting and bookkeeping platforms is well worth the investment. Consider working with IT professionals or consultants to ensure a seamless setup. By embracing technology, you’ll reduce mistakes, speed up processing, and free your team to focus on more strategic tasks.

Keeping up with changing regulations

Payroll tax regulations aren’t carved in stone. Each year, the IRS updates income tax withholding tables, and the Social Security wage base is adjusted to reflect changes in average wages. States may periodically alter their unemployment tax rates, and local jurisdictions can introduce or modify their own payroll-related taxes. In a nutshell, laws evolve regularly, and missing an update can lead to errors. 

Staying informed means regularly checking official sources like the IRS website, subscribing to tax agency newsletters, or joining professional organizations that keep their members abreast of changes. It may also help to assign someone on your team to track these updates and relay important information to the rest of the business. By building a habit of continuous learning, you’ll avoid the panic and penalties that come with being caught off guard.

Consider outsourcing payroll

Managing payroll taxes requires time, expertise, and careful attention to detail. Outsourcing payroll to a professional accounting firm or third-party payroll provider can alleviate these burdens while reducing risks.

Outsourcing ensures that payroll taxes are calculated accurately and submitted on time, protecting your business from costly penalties. These providers stay up-to-date with ever-changing tax regulations, so you don’t have to worry about missing critical updates.

Additionally, an outsourced payroll partner can handle complex issues like worker classification and multistate payroll compliance, giving you confidence that every detail is managed correctly.

Keep your payroll compliance on track

This overview isn’t exhaustive; plenty of unusual scenarios and special rules can still arise. But by understanding the common challenges, staying alert to regulatory changes, using the right tools, and knowing when to call in an expert, you can reduce costly payroll tax errors. Taking action now paves the way for a smoother, more confident tax season and frees you to focus on long-term business growth. If you need guidance or want to ensure your payroll practices are up to par, don’t hesitate to contact our office – we’re here to help.

November 26, 2024 | by Atherton & Associates, LLP

The Pros and Cons of Different Business Entities: A Comprehensive Guide

Choosing the right business structure is one of the most critical decisions entrepreneurs and business owners face. The entity you select will have profound implications on how your business operates, how it is taxed, your personal liability, and your ability to raise capital. With several options available, each with its own advantages and drawbacks, making an informed choice requires careful consideration.

In this comprehensive guide, we’ll explore the various types of business entities, dissecting their pros and cons to help you determine which structure aligns best with your business goals and needs.

Factors to Consider When Choosing a Business Entity

Before diving into the specifics of each business entity, it’s essential to understand the key factors that should influence your decision:

• Liability Protection: The extent to which your personal assets are protected from business liabilities.
• Tax Implications: How the business and its owners are taxed, including opportunities for tax savings or risks of double taxation.
• Management and Control: Who will manage the business, and how decisions will be made.
• Administrative Requirements: The complexity and cost of forming and maintaining the entity, including paperwork and compliance obligations.
• Capital Raising: The entity’s ability to attract investors and raise funds for growth.
• Flexibility: How easily the business can adapt to changes in ownership, management, or strategic direction.
• Future Needs: Long-term goals such as expansion, succession planning, or going public.

Overview of Different Business Entities

Sole Proprietorship

A sole proprietorship is the simplest form of business entity, where an individual operates a business without forming a separate legal entity. It’s an attractive option for solo entrepreneurs starting small businesses.

Pros

• Easy and Inexpensive to Establish: Minimal legal paperwork and costs are required to start operating.
• Complete Control: As the sole owner, you make all decisions and have full control over the business.
• Simplified Tax Filing: Business income and losses are reported on your personal tax return, eliminating the need for a separate business return.

Cons

• Unlimited Personal Liability: You’re personally responsible for all business debts and obligations, putting personal assets like your home at risk.
• Difficulty Raising Capital: Investors and lenders may be hesitant to finance sole proprietorships due to perceived higher risk.
• Lack of Continuity: The business may cease to exist upon the owner’s death or decision to stop operating.
• Limited Tax Deductions: Certain business expenses deductible by corporations may not be available to sole proprietors.

While a sole proprietorship offers simplicity and control, the trade-off is significant personal risk and potential challenges in growing the business beyond a certain point.

Partnerships

Partnerships involve two or more individuals (or entities) joining to conduct business. They share profits, losses, and management responsibilities. There are different types of partnerships, each with unique characteristics.

General Partnership

In a general partnership, all partners share management duties and are personally liable for business debts and obligations.

Pros

• Combined Expertise and Resources: Partners can pool skills, knowledge, and capital, enhancing the business’s potential.
• Pass-Through Taxation: Profits and losses pass through to partners’ personal tax returns, avoiding corporate taxes.
• Relatively Easy Formation: Establishing a general partnership typically requires a partnership agreement but involves fewer formalities than corporations.

Cons

• Unlimited Personal Liability: Each partner is personally liable for the business’s debts and the actions of other partners.
• Potential for Disputes: Differences in vision or management style can lead to conflicts affecting the business.
• Lack of Continuity: The partnership may dissolve if a partner leaves or passes away unless otherwise stipulated in the agreement.
• Difficulty Attracting Investors: Investors may prefer entities that offer ownership shares and limit liability.

Limited Partnership (LP)

An LP includes general and limited partners. General partners manage the business and have unlimited liability, while limited partners contribute capital and have liability limited to their investment.

Pros

• Liability Protection for Limited Partners: Limited partners’ personal assets are protected beyond their investment amount.
• Attracting Passive Investors: The structure is appealing to investors seeking to invest without involving themselves in management.
• Pass-Through Taxation: Similar to general partnerships, avoiding double taxation.

Cons

• Unlimited Liability for General Partners: General partners remain personally liable for business debts and obligations.
• Complex Formation and Compliance: LPs require formal agreements and adherence to state regulations, increasing administrative burdens.
• Limited Control for Limited Partners: Limited partners risk losing liability protection if they take an active role in management.

Limited Liability Partnership (LLP)

An LLP offers all partners limited personal liability, protecting them from certain debts and obligations of the partnership and actions of other partners. It’s often used by professional service firms like law and accounting practices.

Pros

• Limited Personal Liability: Partners are typically not personally liable for malpractice of other partners.
• Flexible Management Structure: All partners can participate in management without increasing personal liability.
• Pass-Through Taxation: Business income passes through to personal tax returns.

Cons

• State Law Variations: LLP regulations differ significantly by state, affecting liability protections and formation processes.
• Potential Restrictions: Some states limit LLPs to certain professions or business types.
• Administrative Complexity: LLPs may have additional filing and reporting requirements.

Partnerships offer the benefit of shared responsibilities and resources but come with risks related to personal liability and potential internal conflicts.

Corporations

Corporations are independent legal entities separate from their owners (shareholders), offering robust liability protection and the ability to raise capital through the sale of stock.

C Corporations

A C corporation is the standard corporation under IRS rules, subject to corporate income tax. It’s suitable for businesses that plan to reinvest profits or seek significant outside investment.

Pros

• Strong Liability Protection: Shareholders are not personally liable for corporate debts and obligations.
• Unlimited Growth Potential: Ability to issue multiple classes of stock and attract unlimited investors.
• Deductible Business Expenses: C corporations can deduct the full cost of employee benefits and other expenses not available to other entities.
• Perpetual Existence: The corporation continues to exist despite changes in ownership.

Cons

• Double Taxation: Corporate profits are taxed at the corporate level, and dividends are taxed again on shareholders’ personal tax returns.
• Complex Formation and Compliance: Incorporation requires significant paperwork, ongoing record-keeping, and adherence to formalities.
• Higher Costs: Legal fees, state filing fees, and ongoing compliance expenses can be substantial.

S Corporations

An S corporation is a corporation that elects to pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes, thus avoiding double taxation.

Pros

• Pass-Through Taxation: Profits and losses pass through to shareholders, preventing double taxation.
• Liability Protection: Similar to C corporations, personal assets are generally protected from business liabilities.
• Attractive to Investors: Offers the credibility of a corporate structure, which can be appealing to some investors.

Cons

• Strict Eligibility Requirements: Limited to 100 shareholders who must be U.S. citizens or residents; can only issue one class of stock.
• Limited Deductible Benefits: Certain employee benefits are not fully deductible for shareholders owning more than 2% of the company.
• Administrative Responsibilities: Must adhere to corporate formalities like holding annual meetings and maintaining records.

Corporations offer significant advantages in liability protection and capital raising but come with increased complexity and potential tax disadvantages.

Limited Liability Company (LLC)

An LLC combines the liability protection of a corporation with the tax efficiencies and operational flexibility of a partnership. It’s a popular choice for many businesses due to its adaptability.

Pros

• Limited Liability Protection: Members are generally shielded from personal liability for business debts and claims.
• Flexible Tax Treatment: Can choose to be taxed as a sole proprietorship, partnership, S corporation, or C corporation, offering potential tax advantages.
• Flexible Management Structure: Can be member-managed or manager-managed, providing options for how the business is run.
• Less Compliance Paperwork: Fewer formal requirements compared to corporations, though an operating agreement is highly recommended.

Cons

• Varied Treatment by State: LLC laws and fees vary by state, possibly affecting profitability and operations.
• Self-Employment Taxes: Members may be subject to self-employment taxes on their share of profits, potentially increasing tax burdens.
• Investor Reluctance: Some investors may prefer corporations due to familiarity and ease of transferring shares.
• Complexity in Multi-State Operations: Operating in multiple states can complicate tax and regulatory compliance.

The LLC offers a balance of flexibility and protection, making it suitable for many businesses, though it’s essential to understand specific state laws and tax implications.

Comparing Business Entities

Taxation Differences

The way a business entity is taxed can significantly impact its profitability and the owner’s personal tax burden.

• Sole Proprietorships and Partnerships: Income and losses pass through to owners’ personal tax returns, and taxes are paid at individual rates.
• C Corporations: Subject to corporate tax rates, with potential double taxation when profits are distributed as dividends.
• S Corporations and LLCs: Generally enjoy pass-through taxation, avoiding double taxation, but with specific eligibility requirements (S corporations).

Liability Protection

• Sole Proprietorships and General Partnerships: Owners have unlimited personal liability for business debts and obligations.
• Limited Partnerships: Limited partners have liability protection, but general partners do not.
• LLPs, LLCs, and Corporations: Offer varying degrees of liability protection, generally shielding personal assets from business liabilities.

Management and Control

• Sole Proprietorships: The owner has total control over decisions and operations.
• Partnerships: Management is shared among partners; roles should be defined in a partnership agreement.
• Corporations: Managed by a board of directors and officers; shareholders have limited direct control.
• LLCs: Offer flexibility; management can be structured to fit the owners’ preferences.

Administrative Requirements and Costs

• Sole Proprietorships and General Partnerships: Minimal setup costs and ongoing formalities.
• Limited Partnerships and LLPs: Require formal agreements and state registrations, increasing complexity and costs.
• Corporations: Higher formation costs and ongoing compliance obligations, including annual reports and meetings.
• LLCs: Moderate costs; while less formal than corporations, they still require an operating agreement and may have state filing requirements.

Choosing the Best Form of Ownership for Your Business

Determining the optimal business entity involves evaluating your specific situation against the characteristics of each entity type.

Consider the following steps:

• Assess Your Liability Exposure: If your business involves significant risk, entities offering liability protection may be more suitable.
• Evaluate Tax Implications: Consult with a tax professional to understand how each entity will impact your tax obligations.
• Consider Management Structure: Decide how you want the business to be managed and the level of control you wish to maintain or share.
• Plan for Capital Needs: If raising capital is a priority, structures like corporations may offer advantages in attracting investors.
• Reflect on Future Goals: Your long-term objectives, such as expansion or succession planning, should align with the entity’s capabilities.
• Understand Compliance Requirements: Be prepared for the administrative responsibilities associated with more complex entities.

Remember, there’s no one-size-fits-all answer. Your business’s unique needs and your personal preferences will guide the best choice. Furthermore, as your business grows and evolves, you may need to reevaluate your entity choice.

How Atherton & Associates LLP Can Help

Navigating the complexities of choosing the right business entity is challenging, but you don’t have to do it alone. Atherton & Associates LLP offers comprehensive tax and advisory services to guide you through this critical decision-making process.

Tax Compliance & Planning

Our team assists businesses and individuals in staying compliant with tax laws and regulations. We provide strategic tax planning to help minimize liabilities and maximize potential savings, all while ensuring adherence to ever-changing tax laws.

Entity Choice Consultation

We provide personalized guidance in selecting the most suitable business entity. By analyzing your unique business situation, goals, and potential risks, we suggest the most beneficial entity type—be it a sole proprietorship, partnership, corporation, or LLC.

Estate & Trust Planning

Protecting your assets and planning for the future are paramount. Our specialized estate and trust planning services aim to reduce the potential tax impact on your beneficiaries. We work closely with you to develop a comprehensive plan that aligns with your financial goals, ensuring a seamless transition of wealth to the next generation.

With Atherton & Associates LLP, you’re partnering with experienced professionals dedicated to your business’s success. Our expertise spans various industries, including agriculture, real estate, construction, retail manufacturing, and distribution services. We understand that each client is unique, and we’re committed to providing tailored solutions that meet your specific needs.

Conclusion

Selecting the right business entity is a foundational step that affects every aspect of your business, from daily operations to long-term growth. By thoroughly understanding the pros and cons of each entity type and considering your individual circumstances and goals, you can make an informed decision that positions your business for success.

At Atherton & Associates LLP, we’re here to support you through this process, offering expert advice and services that help you navigate the complexities of business ownership. Whether you’re just starting or looking to reassess your current structure, our team is ready to assist in charting the best path forward for your business.

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Contributors

Jackie Howell, Tax Partner

Email: jhowell@athertoncpas.com

Jackie Howell has been in public accounting since 2010, with a concentration in tax compliance and planning for individuals, privately held corporations, partnerships, non-profit organizations, and multi-state taxation. Her unique skill set allows her to assist clients across a broad range of industries, including agriculture, real estate, construction, retail manufacturing, and distribution services.

Natalya Mann, Tax Partner

Email: nmann@athertoncpas.com

Natalya Mann brings seventeen years of experience as a Certified Public Accountant and business advisor. She specializes in tax compliance, tax planning, business consulting, and strategizing the best solutions for her individual and business clients. Natalya collaborates with clients in healthcare, professional services, real estate, manufacturing, transportation, retail, and agriculture industries.

Craig Schaurer, Tax Partner, Managing Partner

Email: cschaurer@athertoncpas.com

With a career in public accounting since 2006, Craig Schaurer focuses on tax compliance and planning for the agricultural industry, including the entire supply chain from land-owning farmers to commodity processing and distribution. His expertise encompasses entity and individual tax compliance, specialty taxation of Interest Charged Domestic International Sales Corporations (IC-DISCs), and cooperative taxation and consultation.

Rebecca Terpstra, Tax Partner

Email: rterpstra@athertoncpas.com

Rebecca Terpstra specializes in tax planning, consulting, and preparation for individuals and all business entities. She has extensive experience working with large corporations and high-net-worth individuals across various industries, including agriculture, manufacturing, telecommunications, real estate, financial institutions, retail, and healthcare.

Michael Wyatt, Tax Manager

Email: mwyatt@athertoncpas.com

Michael Wyatt has been serving in public accounting since 2019. He specializes in corporate, partnership, and individual taxation, as well as tax planning. Michael provides tax services for clients in the agricultural, real estate, and service industries. He has experience with estate and business succession planning and multi-state taxation, assisting clients through complex transactions.