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Business Formation AttorneyIn order to truly thrive, a business needs the proper foundation. If you are forming a new company, you need to choose the right legal structure for your business. Selecting the best tax entity is crucial—it could save you (or cost you) thousands of dollars each year. In this article, our Northeast Ohio business formation attorney provides a brief overview of the most important things you need to know about selecting the best tax entity for your company.

Should Your Business Be Taxed as a Pass-Through Entity?

When thinking about tax planning and business formation, the first question you need to ask is: Should I opt for pass-through taxation? As explained by the Tax Policy Center, a pass-through entity is one where profits “flow” through the company directly to the owners. As a result, the profits are taxed as individual income instead of under corporate rates. Pass-through entities come in a wide range of different forms, with some of the most notable examples being:

  • Sole proprietorships;
  • Limited Liability Companies (LLCs);
  • Partnerships; and
  • S Corporations.

What are the advantages of being taxed as a pass-through entity? For many companies — especially for small businesses — pass-through status results in a company facing a lower effective tax rate. You can avoid the double taxation problem altogether. While being taxed as a pass-through entity offers significant financial savings for many businesses, there are exceptions.

Every Business is Different — Tax Advantages of a C Corporation  

For certain companies, there are advantages to operating as a C Corporation — which is not a pass-through entity. While C Corporations are subject to corporate taxes, there are some important tax benefits for certain companies. Specifically, some of the potential tax advantages of C Corporations include:

  • Ability to carry profits or losses forward and backward;
  • More flexibility in writing off business expenses; and
  • Additional capacity to accumulate funds for future use.

Beyond the potential tax savings, there are other advantages to operating as a C Corporation. With this type of business structure, it is far easier to attract investors and grow the company. To be sure, there are drawbacks as well — it is more time-consuming and expensive to set up a C Corporation. As such, it is certainly not the best option for every business. Some businesses would be better off operating as an LLC or an S Corporation.

Get Help from Our Cortland, OH Business Law Attorney Today

At The Law Office of John C. Grundy, our Ohio business lawyer has the skills and experience needed to handle the full range of business formation issues. If you have questions about choosing the right tax entity for your company, we are here to help. To set up a no cost, confidential consultation, please contact our legal team right away. With an office in Cortland, we handle business law matters throughout Northeast Ohio, including in Warren, Youngstown, Middlefield, Orwell and Ashtabula.