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Choice of Entity



Remember: Any company can have losses. As long as the owner is not a hobby company, losses are fully deductible every year with very little limitation. This company is called a “For Profit” venture. A hobby has requirements as to time devoted, size, procedures of administration and conducting the business before it can be upgraded to a “For Profit” venture.

​ Remember: In the early stages of your business it is always best to “start slow”. It is easy to incorporate but it is much harder to get rid of a corporation once filed with the government. There are three choices of “For Profit” structures:
1)  Sole Proprietor with possible LLC (entity ignored designation with IRS).
2)  Partnership with possible LLC designation or added name and protection.
3)  Corporation with possible LLC designation added name giving no added protection.

Two types of corporations:   
 S-Corporation  or   
C-CorporationNow,

​of these three types of “Entities” there are two categories of these above “Entities”:
Pass-thru entities 
 or Non-pass thru entities.

​All of the above are pass through entities except the C-Corporation. Pass through means that the profits or losses of the entity are passed through onto the personal tax returns of the owners. The way you get money out of a C-Corporation is by salary, commissions, rents, interest, etc. There are many, many reasons for choosing one type of entity over another. Each group of persons has different reasons for consideration of entity choice.  

​Three of the differences between pass-thru entities and a C-Corporation can be described as tax benefits of a C-Corporation:

1) C-Corporations allow the owners to deduct all medical insurance.
2) C-Corporations allow the owners to deduct all medical bills not paid by insurance. 
3) C-Corporations have a very low tax rate—25% for earnings up to $75,000.

​Most of the large corporations of America are C-Corp. For a corporation to be C-Corporation much planning has to be in place to insure a long term strategy to deal with the sale of C-Corp.