Thread by Mitchell Baldridge (🍅,🍅)

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The number one question I get as a CPA:

Should I open up an LLC?

Choosing the right business entity costs a bit, but can save you millions over the life of your business.

Time for a thread 👇🏼
This thread will mostly center around tax structuring and planning for Federal Income Taxes.

One thing to understand in selecting an entity type - It's complicated.

There are different issues in all 50 states, and loads of legal considerations.

Seek qualified counsel!
For Federal Tax purposes there are 3 main entity types I'll cover.

Disregarded - legal entity that doesn't file a return.

Pass through - Entities that file tax returns but don't pay, passing activity to owners through a K-1.

C-Corporations - Files return and pays tax.
Disregarded entities are not all that interesting from a tax standpoint - People create these entities for many reasons like asset protection, privacy, probate avoidance, etc.

This is generally not a tax savings structure, and isn't a strategy you'll to hear about on tiktok.
Pass through's - This is where the fun starts.

There are tons of entity types you can set up in each state.

LLC's, LLPs, LPs, PCs, PLLCs, Incs, etc..

These will have different legal characteristics and all be useful for different reasons, but all of them pass through for tax.
Partnership entities are generally used to pass through income on a pro-rata basis, and assets can be freely contributed and distributed.

All of the deals you see on #RETwit are happening in partnerships.

Important to note - partnerships contain 2 or more people (not a joke.)
Partnerships carry the most flexibility and will often be a part of a business entity structure in some form or fashion.

They are often used in families as Family Limited Partnerships - these often have 2+ classes of members (voting, non-voting, etc..)
They also allow families to pass assets through generations upon death without being subject probate.

Also, they can create opportunities to gift assets through generations at a discount, as the shares are often very illiquid and do not have different voting rights.
Another type of Pass Through entity often talked about is the S-Corp. This is another type of LLC or Inc that makes an election to be treated as an S-Corp by the IRS.

There are certain restrictions (less than 100 people, only US People, no entity owners, etc.

These are fun!
S-Corps mostly hold consulting type, asset light businesses. They are not easy to unwind or get assets out of without being subject to Built In Gains Tax, which is no fun. And they default to being C-Corps, which can be catastrophic.

But the opportunities are immense!
Creators and small business owners use S-Corps to avoid paying some payroll taxes, which are 15.3% of earnings.

By paying a reasonable salary, owners can bifurcate their employment from their ownership and pay themselves salary, often times saving thousands in employment taxes.
Very profitable S-Corps can optimize for QBI, saving a 20% deduction on their business earnings.

S-Corps in certain high tax states can elect pay state taxes out of the entity, preserving the SALT deduction that was done away with in the TCJA of 2017.
Finally there is the C-Corp. C-Corporations are not pass through entities, but their own person in a sense.

Corporations pay a 21% flat tax in the US, but dividends (profits paid out of the corporation to owners) are taxed again at 15-23.8% tax.
VC backed companies are often structured as C-Corps because of a few benefits.

QSBS - The big benefit. Qualified Small Business Stock (1202 Stock) allows an original issuance shareholder to hold stock for 5 years and claim a 10 Million dollar exemption on the gains on stock.
Losses - Even though the losses don't pass through, most VC investors don't need the losses or can't use them until they offset the gains.

No passthrough losses can be a feature rather than a bug, because you don't mark investments to market as often like you would with a K-1.
Publicly traded companies in the US are all C-Corps.

Other people like C-Corps because the 21% tax rate allows you to compound at a lower rate and achieve objectives quicker.

Similar to partnerships, the stock can be gifted, sold and moved around for estate planning purposes.
So which one is for you? Again, nothing here is financial advice. Get real help from a business attorney.

I predominantly see small businesses set up as S-Corporations or partnerships if they are asset heavy..

No this doesn't give you magic powers to deduct your dog's food.
These entities do allow you to take advantage of some of the best breaks out there today, and create a container for you to run your business with some legal liability protection.
My favorite sources for setting up businesses -

1. Your local business attorney - working with an attorney on setup can be the right move. Especially for complex businesses. You're going to need them at some point anyhow!

@SMB_Attorney is a great resource for this.
2. BetterLegal - @csakon has built a great app where I love to refer clients and friends. They are low cost, fast, and don't sell you a bunch of junk you don't need or farm out your data like some of the others.

Use the link below for $100 off.

betterlegal.com/?aff=7883d2cfe28d
As I mentioned - this is a wide ranging issue that I have just scratched the surface on.

DYOR, and set yourself right the first time.
Follow me @baldridgecpa and look at my pinned tweet for more content like this.

I’d appreciate it if you would go back to the first tweet and like/share it! Thank you.

For more info like this, be the first to know when my course Tax Free Entrepreneur launches next month.

sendfox.com/lp/3ee2qp
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