Legal and Tax Structure

Business owners often pay more taxes than required when their legal and tax structure isn’t aligned with the goals of their business. For example, many companies are legally structured as LLCs for liability purposes and file a Schedule 1120s for S corporations. This can be appropriate for some.

However, with the recent Tax Cuts and Jobs Act (TCJA) 2017, several significant changes were made to the tax code, including the lowering of the top corporate tax rate from 35% down to a flat 21%. This can provide for significant tax savings—depending on your situation.

As another example, a C corporation, unlike an S corporation, is allowed to fully deduct premiums paid for health insurance premiums while the employee does not have to claim those benefits as income. If monthly premiums for health insurance are $1,200 ($14,400 annually), the deduction can be significant if the owner/employee is in a 37% federal tax bracket. If the owner/employee lives in a state where state income taxes are an additional 5%, the total deduction equals 42% on $14,400—or a tax savings of $6,048.

A C corporation can have unlimited shareholders and issue different types of stock, which allows for certain shareholders to have more voting power than others. This can make a difference when it comes to deciding the amount of each bonus and when they are paid. The more control you have over such decisions, the more you can implement strategies which benefit you rather than the other shareholders. This can be particularly valuable when choosing the type of qualified retirement plan—and the investments within the plan—that best suits you and the taxation of the assets within the plan.

Of course, there are many factors and circumstances to take into consideration, and no particular structure is inherently better than another. K2 Business Group will guide you to the best options for your individual situation.