Business Tax Planning Strategy

Posted by Alan Finkel on October 24th, 2023

Purchasing or Selling a Business - the choice to acquire or sell a company is influenced by a number of factors. One of the most important of these should be the tax implications. Adopting a multi-year purchasing strategy can often help to reduce the tax burden for both people trying to acquire and those looking to sell a business under the current tax structure. If a buyer receives all of the profits at closing rather than adopting a deferred compensation or installment plan for the acquisition, his or her taxable income is likely to be expand.

When deciding to start a business, entity selection is a crucial component of strategic tax planning. Aside from personal accountability issues, certain entities may be subject to double taxation or tax deductions. The following are the most prevalent types of corporate entities, along with a review of their advantages and disadvantages:

The first is the C-Corporation. A C-Corporation is a popular corporate structure, especially for large corporations. The most prevalent type of corporation listed on stock exchanges is a C-Corporation. While they separate business and personal assets, preventing personal liability on business assets, they are frequently less tax advantageous than other forms. This is due to "double taxation," which occurs when profits made by a corporation are taxed once and then taxed twice when they are distributed to shareholders. Aside from the negative tax status, federal and state legislation impose a number of constraints on these businesses, such as required yearly meetings.

S-Corporations are a form of business. An S-Corporation, like a C-Corporation, separates corporate and personal assets, which means that S-Corporation owners do not have to worry about creditors seizing their personal assets. An S-Corporation, unlike a C-Corporation, is not liable to double taxation. Instead, "pass-through taxation" is employed by this company structure, which passes and taxes firm revenue to individual shareholders. A corporation must meet a variety of requirements to qualify as an S-Corporation, including a shareholder cap and the requirement that all stockholders be US residents.

Limited Liability Corporations (LLCs). Limited liability companies have risen in popularity in recent decades due to their favorable tax classification and decreased personal liability. Like the previous two business structures, limited liability corporations’ separate business and personal assets, allowing the owner to escape personal liability for corporate obligations. Limited liability businesses, like S-businesses, use "pass-through taxation," which means that the profits from the business are taxed only once. In contrast, limited liability companies do not have the onerous shareholding limits of an S-Corporation.

Partnerships and sole proprietorships are examples of business structures. Sole proprietorships and partnerships are the simplest to form--and usually the worst. While no state registration is required- the law assumes that a sole proprietorship or partnership was formed simply by establishing a business without filing any other entity documentation to the state; both of these business forms impose personal liability on the business owners. This unnecessary burden can be avoided by incorporating an LLC or S-Corporation, both of which provide the same "pass-through" tax benefits. Partnerships are especially onerous since a partner is liable for commercial debts made by the other partner, often without his or her permission.

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Tax Planning Attorney in Maryland is committed to strategic tax planning and tax preparation for any individual, corporation, or legal entity. Our team with expertise in the tax code, company law, and estate planning, can ensure that all of your tax obligations are satisfied in the most effective way possible.