In a recent article on Accounting Today, Anthony DeStefano outlines the advantages and disadvantages of different organizational structures for small businesses. DeStefano quickly focuses on the S Corp as one of the best options for most small businesses.
Below is an excerpt from the article.
A client of mine recently asked me what I thought was the best organizational structure for a small business, all things considered, especially related to the tax issues. So, I put together a list of advantages and disadvantages of all four entity types that I thought were most relevant. They are C corporations, S corporations, single member LLCs and multi-member LLCs.
I immediately excluded sole proprietorships and partnerships because these entity types do not protect a business owner’s personal assets from business liability, and the owner or owners personally assume the liability of both types.
I believe based on my analysis that S corporations are the best option for almost any small business. Let’s compare the advantages and disadvantages of S corporations.
Of course, the shareholders’ tax brackets and effective tax rate are important. An effective tax rate is the actual rate a taxpayer pays, calculated by dividing total tax by taxable income. A marginal tax rate is the rate at which the next dollar of income is taxed. I wouldn’t consider the marginal tax rate. The top tax rate is important. While the top tax rate is a flat 21 percent for C corporations and personal service corporations, the top rate for shareholders of an S corporation is 37 percent, but it is a graduated rate, so I believe the effective tax rate must be considered.
Another issue that must be considered for this analysis is that it appears most likely that we will have a new presidential administration next year, and some of the benefits of any entity type may very well disappear. That complicates tax-planning matters, but not entirely.
There are issues related to the recognition of income, the deduction of expenses and tax credits that should be considered, but many of these are the same for every business type. Note that I did not include the tax provisions of the CARES Act and the Families First Coronavirus Relief Act below because many of those issues are temporary. The tax credits in each, and the deferral of payroll taxes, apply to all entities.