llc | s corporation

Advantages and Disadvantages of LLCs and S Corporations

S CORPORATION AND LLCS

Commonly known as LLC, a Limited Liability Company is an incorporated association tasked with providing limited liability to its members (owners). The company’s members are generally not personally liable for its Debts, Obligations, or Liabilities. 

Also, the owners are allowed to be part of the managing activities and control of the company, without exposing themselves more than they are required to. Like corporations, Limited Liability Companies are formed by filing an organization certificate with the Commonwealth secretary and thereafter, paying a fee. 

In case you were wondering how Limited Liabilities Companies operate, they do function under the operating agreement terms, which is a document that’s comparable to a partnership agreement. It’s also imperative we note that LLCs file annual reports with the Commonwealth Secretary. 

llc | s corporation

What’s the difference between the LLC and LLP

As you can already tell, an LLP is a partnership that limits a partner’s personal liability just by registering with the Secretary of the Commonwealth. The partner will be limited in Debts, Obligation, or Liabilities. In a Limited Liability Partnership, a partner is not permitted to eliminate liability for his or her own negligence. They are also limited whether in contract, tort, or otherwise from errors, omissions, negligence or wrongful acts. 

Classification for Massachusetts income tax purposes 

These two companies are classified the same way for Massachusetts tax purposes as they are for federal income tax purposes. 

For Massachusetts income tax purposes, a single-member Limited Liability Company won’t be regarded as an entity that’s separate from its owner, if it’s not regarded for federal tax purposes. 

If they have been treated as a partnership for Massachusetts income tax purposes, An LLC or an LLP with more than two members will be treated the same way for federal tax purposes. The same principle applies in a situation where they are treated as a corporation. 

The S corporation 

We’ve already established that a single-member Limited Liability Company gets taxed as a sole proprietorship while multiples are considered a partnership. However, if the LLC were taxed as an S corporation, that would mean that the owner’s salary would be treated as a business expense. This also means that they need to report the salary together with other business profits on their personal income tax return.

Shareholders in an S corporation can be individuals or organizations and businesses. Firms considered S corporations for federal purposes are treated the same way for Massachusetts purposes. 

One other thing that’s important to mention is the fact that the entity’s income, losses, and different deductions are always passed through the various shareholders, and often reported and taxed on the individual returns.  

Advantages of S Corporation 

  • There’s limited liability for shareholders and management. 
  • In addition to the unlimited number of management, there are no state residency requirements.
  • You can protect yourself from personal liability using a distinct, court-recognized existence. So if you’re smart, you won’t have to lose your personal wealth in assets like a car, home, or nest egg.
  • Flow-through taxation: after the profits have been equally distributed to the shareholders, they’ll be taxed on a personal level.
  • There’s incredible privacy protection.
  • A great income-splitting potential for employees/owners. 
  • Only entities that offer consultative services can operate effectively as S Corporations as they don’t have significant start-up costs or heavy machinery.  

Disadvantages of the S corporation 

  • The shares are all subjected to seizure and sales at the shareholder level, in a court proceeding.
  • There is a maximum limit on the number of shareholders the company should have, and the shares have to be held directly. 
  • Tax-free benefits are only given to employees holding two or more percent of the firm’s shares. 
  • Due to the fact that flow-through taxes are paid at a personal rate, high-income shareholders often find themselves paying more on their distributions. 
  • Control is ultimately on the stockholder’s hands, so it’s not suitable for an estate planning vehicle. 
  • It’s really not suitable for holding appreciating investment. The capital gains tax that you end up paying after selling your assets will incur high taxes compared to those paid by LLCs. 
  • Limited to one class of stock. 

The primary benefit of S Corp taxation is that the corporation’s shareholders don’t have to worry about paying the self-employment tax on their business profits. They only get taxed on the salaries that they earn. However, there’s a catch. Before considering the profits, every owner who is also an employee has to pay a “reasonable” amount as compensation, subject to Medicare and Social Security Taxes.  

Learn More

Ash CPA offers complimentary consultations. Contact our team to learn more about LLCs and S Corporations. We have over 20 years of experience assisting business of all sizes and industries. Call (617) 462-6651 or book an appointment online.

bookkeeping framingham ma

How Bookkeeping Benefits Entrepreneurs

Bookkeeping Framingham MA

Bookkeeping is the process of keeping correct records of company expenditure and revenue. Entrepreneurs may choose to do their own bookkeeping to save on expenses but others may prefer hiring a skilled accountant. There are many benefits of accurate bookkeeping to entrepreneurs such as;

Budget Forecasts and Preparations

Bookkeeping is necessary because it assists in the entrepreneur’s budget. When revenue and expenses are correctly prepared it becomes easier to forecast financial incomes and expenditures. The budget helps in planning for future expenditures and the expected revenue that would cover those expenditures.

bookkeeping framingham ma

Tax Preparation

Bookkeeping facilitates easier revenue reporting for tax purposes at the end of the financial year. Accurate bookkeeping ensures tax filling process is handled efficiently. In addition, it ensures financial information is organized and ready during the tax filing period. Lack of proper bookkeeping means a lack of documents to support tax deductions.

Business Analysis

Entrepreneurs and business managers use bookkeeping to analyze business performance. Financial statements are produced frequently for business analysis. This helps to keep track of cash outflow and cash inflow. The financial reports also provide information on which business is performing well or not performing. This analysis helps pay attention to business strength and improve on its weaknesses.

Financial Management

Complete documenting system helps entrepreneurs analyze expenses and income on each item the information can be analyzed and compared to previous weeks, months or years. This allows entrepreneurs to find out ways to reduce business expenses in order to improve profit margin. Bookkeeping is necessary since it helps you be in control of your business finances.

Business Growth and Profitability

Accurate bookkeeping is important to determine if the business is really making a profit or not. It provides entrepreneurs a platform that monitors the business’s growth. This provides information on which business lines make a profit and areas where expenses can be reduced. This type of financial analysis is important to avoid future problems. Bookkeeping helps keep track of business growth. 

Payroll

Bookkeeping also involves confirming payroll accuracy to be sure that every employee received the correct salary amount. Checking the payroll numbers ensures all the employees are contented with their salaries, also helps the company avoid underpaying or overpaying payroll taxes.

Business Information Organization

Bookkeeping involves organizing financial information; this makes it easier to trace financial records at any time. Accurate documentation enables the entrepreneurs to provide financial information to the company’s stakeholders such as employees, tax authorities, investors, lenders, and customers. Disorganized bookkeeping can ruin your connection with the company interested parties, such as lenders.

Decision-making

This service provides all available business information. It is important for the entrepreneur to have access to all the available financial information to be able to make a profitable decision. In addition, investors or lenders use the company financial information to make a decision about company worth and investment decisions.

Learn More About Bookkeeping

Ash CPA offers a variety of accounting and bookkeeping services. Speak to us today. Moreover, we have over 20 years of experience assisting business of all sizes. Call (617) 462-6651 or book an appointment online.

Tax Cuts and Jobs Act

Tax Cuts and Jobs Act -What Business Owners Need To Know

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (TCJA) legislated in December of 2017 has had positive impacts in the lives of citizens and the corporate world as well. It has reduced the income tax for the majority of people until 2025. Businesses and corporations, on the other hand, have received a remarkable cutback in their income tax rates. Other changes include a reduction in taxes for individuals that own pass-through entities, a rise in estate tax exemptions as well as alternative minimum tax. The negative side of TCJA includes its eradication of tax breaks and certain deductions.

The Tax cuts and Job act is expected to generate more job opportunities, increase the economy’s growth by 1.7%, raise wages by 1.5% and capital stock by 4.8%. These expectations are a result of the decrease in corporate income tax. As a business owner, it is essential that you are familiar with these laws and their impact on your trade.

Tax Cuts and Jobs Act

20% Deduction

The TCJA bill lowered business tax to 21% for large corporations. This deduction, however, does not apply to small businesses such as partnerships and Sole Proprietors as they are pass-through business entities. Since these entities are taxed through their owners’ individual tax return, the legislature introduced a 20% deduction on their ‘Qualified Business Income’. Domestic business owners then pay tax on only 80% of their income. This deduction, however, applies to income below $157,000 for single taxpayers and $315,000 for married people. The TCJA, therefore, offers something for every kind of business regardless of its size. Consult a professional to check if you are eligible for the deduction or how you can take advantage of this new bill.

Bonus Depreciation

Business assets such as machinery wear out and tear over time. For this reason, the asset’s cost is spread over its service life by the depreciation process. While this process is useful for a business’s accounting reasons, it also helps in taxation as business owners can deduct the amount spent on an asset as expenses by IRS rules. Bonus depreciation, on the other hand, entails a significant deduction on the cost of a long-term fixed asset made instantly in the first year instead of over its useful/service life. This deduction has been 50% of the asset’s cost from 2015 until 2017 when the TCJA increased it to 100%. The change will, however, only last up to 2023.

Assets that qualify for the new bonus depreciation rate include private property such as cars, furniture, and equipment that is used in the business and can last for almost 20 years. It, however, does not apply to real property like real estate. Business owners should discuss with their accountants to know if and how they can benefit from this new deduction.

Changes in Net Operating Losses

Losses are normal in business. When the income of a company in one year is less than the expenses it has incurred, the business then has a Net Operating Loss. Before TCJA, a business could get a refund of the taxes it has paid for the past two years by carrybacks. The bill has however removed carryback except for losses in the agricultural industry. The NOL is now deductible on 80% of income in the future years.

Removal of Some deductions and Certain Credits

The new tax bill has also scrapped off deductions such as expenses on entertainment and local lobbying as well as domestic production.  Deductions in meals offered by employers to their workers remain but only until 2026. It is therefore essential for business owners to plan and budget for these expenses. The bill has also established a tax credit for employees on leave. This credit involves 12.5% of an employee’s leave salary on the condition that the payment is 50% of the regular wage. If the employee receives more than 50%, the credit also raises. This tax credit, however, applies in 2018 and 2019 only and for leaves that last for a maximum duration of 12 weeks. Employers and business owners should thus consider this tax credit when paying employees on leave.

Reforms in Estate Tax

For most business owners, their acquired wealth is usually passed down to their younger generations after death. This wealth, in the hands of a different owner, is taxed on if it exceeds the exclusion amount. The exclusion amount has varied in different years, and in 2017, it was at 5.49 dollars. The Tax cuts and Jobs Act raised this amount to $11.9 million in 2018 for single taxpayers and 22.36 million dollars for married people. This new exclusion amount was twice the amount in 2017, and hence more people, especially those who own small businesses can pass down their estates for free. However, this exclusion amount will last only up to 2026, where it will go back to $ 5million. The new estate tax will, therefore, make it easier for heirs of small businesses to take over the business.

Learn More

In conclusion, the Tax Cuts and Job Act was created to boost trade, develop small businesses, and consequently improve the economy. Business owners should hence familiarize themselves with these laws and use them to grow. Learn more by scheduling a consultation with Ash CPA. You may call 617) 462-6651 or request an appointment online. Also, we are located at 945 Concord Street, Suite 100 Framingham, MA 01701.