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Austin TX Business Law Blog

Friday, May 18, 2018

Selecting a Business Entity Under the New Tax Code

How has the new tax code altered business taxes?

The business world is abuzz with talk of how the new tax code may impact numerous critical aspects of a business’ taxes. Selecting a business entity for your new business has long been a critical decision for business owners. Your business entity will determine how you are taxed, as well as vital issues of liability and control over the business. Due to the tremendous impact of your entity choice on your taxes, it is possible that the new tax code could alter the entity choice of some new business owners. Our Austin, Texas business formation lawyers explore the topic of entity selection and how it could be impacted by the new tax law below.

Entity Selection Options

If you are a solo business owner, you can elect to form an LLC, sole proprietorship, C-corporation, or S-corporation. Businesses with multiple owners can choose from a partnership, LLC, C-corporation, or S-corporation. Taxation for these entities may change as follows:

Partnership or Sole Proprietorship

The taxation structure for partnerships or sole proprietorships will not change, but your tax rate might. Income generated through a partnership or sole proprietorship will be taxed according to your individual income tax rate. Sole business owners will need to pay self-employment tax. Under the new tax law, most people will pay less in taxes than they did previously, which could lead to lower taxes for these types of businesses. Further, a new deduction now exists for pass through business income, which may benefit partnerships or sole proprietorships.

LLC

Limited Liability Companies are similarly taxed according to the owner’s personal tax rate. Under the new tax code, LLCs that make under a certain amount each year will be able to deduct 20 percent of their income as a pass through entity. This deduction may not, however, last forever. It may be phased out in the coming years.

S Corporations

Income generated under an S corp is taxed at individual income tax rates. Like an LLC, under the new tax code, this entity may qualify for the pass through deduction. Further, S corp owners are not subject to self-employment tax. S corps must pay owners a reasonable level of compensation and these wages will be taxed at normal income tax rates.

C Corporations

C corporations are taxed at their own set rate. Income distributed by the C corp is then subject to taxation according to the taxpayer’s income level. Previously, this taxation structure had fallen out of favor due to the dual taxation. Now, however, a C corp is taxed at a flat 21 percent, though income is still separately taxed. Your business entity attorney can review your proposed business and tax history to select the best entity choice.


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