Spend What You Want And Pay Taxes Later
The better you organize your finances the easier it will be to utilize tax strategies that will allow you to keep more of your earnings for yourself. You have to create an entity that will draw in revenue and allow you to write off certain things as an expense.
There are a few options and you should definitely look over your situation and decide which entity best meets your needs.
1. Limited Liability Corporation
A Limited Liability Corporation, or an LLC, is like a combination of the best parts of a partnership and a corporation. It offers the owners protection from personal liability for any debts the LLC may incur. In this way it is similar to a corporation. It differs from a corporation in the way it is taxed. An LLC doesn’t pay it’s own taxes it is considered a pass-through tax entity. This means any profits or losses of the LLC passes through to the owners. The owners in turn will report them on their tax returns.
Along with the passing through of any profits or losses, the owners of an LLC are protected from personal liability for any debts the business incurs or any claims filed against the business. In other words, if your LLC is unable to pay a creditor that creditor cannot come after any of your personal possessions. This is where the “limited liability” comes from.
Now even though your personal possessions are protected under the “limited liability” there are some instances where you can become liable. If you yourself directly injure someone, personally guarantee a bank loan, fail to deposit taxes withheld from your employees wages, intentionally perform fraudulent acts that cause harm to the company, use the LLC as an extension of your personal affairs this will cause you to become liable for your actions.
It is very important that, if you choose to form an LLC, you treat it as it’s own business and keep it separate from your personal affairs.
Tax Outlook
The key tax advantage of creating an LLC is that you don’t have to pay taxes on the money that your business spends. Legitimate expenses to your business can be deducted or “written off” from your business income. This will lower the profits of your business that you have to report to the IRS and in turn decrease the taxes you will be required to pay.
2. Corporations
A Corporation is a legal entity separate from its owners. Like an LLC, it has liability protection. Therefore your personal assets are separate from that of the Corporation and you aren’t held liable for the debts of the company. The difference between Corporations and an LLC is that with Corporations you can raise capital by selling shares of stocks.
There are also some additional responsibilities that are involved with Corporations. For instance, in order to remain a Corporation you must hold an annual meeting and take Corporate minutes and appoint the appropriate officers.
Tax Outlook
Aside from being able to write off the expenses of your business, a Corporation is also an independent tax entity, separate from the owners and anyone who may control and/or manage it. Therefore, the owners will not use their personal tax returns to pay tax on any of the Corporations’ profits. The Corporation will pay the taxes on these profits itself. The owners will pay income taxes only on salaries or bonuses received from the Corporation.
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