Tax season is in full swing, and, if you take your business seriously, you already have your entity in place and the right expert to assist you with your state and federal filings for 2016. If you want your clientele, colleagues, and stakeholders to take you seriously, organizing an LLC or chartering a corporation is a "must". A mis-organized business is a disorganized business. And the consequences can be, well, taxing.
The oldest and most established sort of business entity we see on Music Row is the corporation. A corporation has its own legal existence, separate and apart from its shareholders. It can sue and be sued, incur debts, own and sell property, and enter into contracts.
But merely coughing up $100 to the Tennessee Secretary of State and having a charter in hand does not mean you have a legitimate corporation. Bylaws, minutes, and records must be kept. Meetings of directors and officers must occur - even if that means that you conduct the meeting by yourself and for yourself. Otherwise, if your business is sued, a legal doctrine known as "piercing the corporate veil" could bite hard. And you could be just as much "on the hook" as you would be if you continued as a sole proprietor.
Some tax advisors lean toward the LLC as their entity of choice for startup businesses. This is because of its simplicity. LLCs have liability protection, and tax liability merely passes through to the individual member or members. However, I am advising my clients to consider the tax advantages of S-Corp status. This particularly applies to the monster known as the "Self Employment Tax", which combines the Social Security and Medicare payroll taxes into one gigantic picking of your pocket each spring. With some clever accounting, the Self Employment Tax can be minimized.
Corporations can be a bit more complicated, to be sure. A "C" corporation is subject to double taxation (No - it's not a good thing at all). The corporation pays a tax on income when earned, and shareholders pay a tax on their dividends. An "S" corporation, however, does not pay income taxes. Profits and losses pass directly to shareholders.
Employing yourself and taking some pay as dividends rather than as direct compensation can save you big money come tax time. Call us for more information on our strategies.