One of the questions I get a lot from seminar participants and prospective clients is when they should get their entities set up and in proper order? Should they do it prior to beginning their business/investment activities? Should they simply form a limited liability company (LLC) and then wait until they are in business for awhile before getting with a tax advisor? Or, should they operate as a sole proprietor (i.e., no entity) until they are profitable?
These are good questions not to be ignored. As you would expect, my preference is to get your entities set up properly prior to starting your business. I can think of three good reasons for this.
First, by setting up your entity foundation prior to beginning business, you can be sure that you are protecting yourself and your business right from the get go. A lot of potential liability occurs during the start up phase of a business, as many people are unfamiliar with laws and easily make mistakes.
Second, setting up your tax structure early on allows you to maximize your tax deductions. There are several elections that you have to make on your first tax return for the business. It's best if you are in the entity that is best for you when you make these elections.
Third, you have a lot of expenses during the evaluation and start up phase that you would eventually like to deduct. Setting the business entity up correctly from the start will allow you to track all of those expenses and make the necessary elections to eventually deduct them.
For certain types of entities, e.g., S corporations and LLCs taxed as corporations, the election to be treated as that type of company needs to be made early on in an entity's existence. Call this a fourth, or “bonus” reason for setting up your structure prior to beginning business.
The good news is that even for those of you who have not set up your business structure to the best benefit, you can make changes to it and obtain the tax and asset protection benefits for the future. In some cases, you can even make retroactive elections. The IRS has several published procedures for late elections that your tax advisor can discuss with you.
In any case, don't wait any longer. The sooner you act and create your perfect foundation for you business and investments, the sooner you can take advantage of all of the tax benefits that are available for the prudent and informed business owner and investor.
Hey Tom I discovered your podcast recently. I love your site. About this article… I wonder if you have any advice on what entity I should set my business up as? I am a digital marketer selling a service, not a product, if that helps at all. Can you point me to the right direction? Kiyosaki said in his 3rd Rich Dad Poor Dad book that a C-Corporation might be the best way to go, but I am still unsure.
Thanks!