How Smart Business Structuring Can Help You Avoid Taxes Legally

How Smart Business Structuring Can Help You Avoid Taxes Legally

It is a federal crime to evade taxes. However, you can avoid taxes by being smart about the way you structure your business. The difference between tax evasion and tax avoidance is its execution. Tax evasion is when you fail to pay or deliberately underpay taxes by not reporting or under-reporting profits. Tax avoidance, on the other hand, is the arrangement of your finances to minimize your tax liability.

The Strategic Move: From Sole Proprietor to S-Selection LLC

For certain self-employed business owners, moving from a sole proprietor to an S-selection LLC might make the difference between overpaying the IRS or not. At the very least, it’s a way to mitigate taxes paid on income earned.

Tax Advantages of Operating as an S-Corporation

Choosing to operate as an S-Corporation (S-Corp) can offer several tax advantages compared to being a sole proprietor. One significant advantage is the ability to pay yourself a salary and take distributions from the company's profits. By structuring your compensation this way, you can potentially reduce your self-employment tax liability.

As a sole proprietor, all of your business income is subject to self-employment taxes, which include both the employee and employer portions of Social Security and Medicare taxes. This can result in a substantial tax burden, especially as your business grows.

However, as an S-Corp shareholder-employee, you can split your income between a reasonable salary and distributions. While the salary portion is subject to employment taxes, the distributions are not, allowing you to potentially save on self-employment taxes.

Additionally, operating as an S-Corp may offer other tax-saving opportunities, such as the ability to deduct certain business expenses that are not available to sole proprietors.

Requirements and Responsibilities of an S-Corp

It's important to note that transitioning to an S-Corp involves certain requirements and administrative responsibilities, such as filing articles of incorporation, holding regular shareholder meetings, and adhering to corporate formalities. Consulting with Ace can help you determine if making the switch to an S-Corp is the right move for your business and ensure compliance with tax laws and regulations.

By understanding the differences between tax evasion and tax avoidance and considering the benefits of transitioning to an S-Corp, self-employed business owners can effectively manage their tax obligations and potentially reduce their tax liability. Ensuring compliance with tax laws and strategically planning your business structure can lead to significant financial benefits and a more stable business future.

Feel free to reach out to us at www.acemmm.com to discuss how we can assist you with your business structuring and tax planning needs.