NOVEMBER 2020
Khaas Baat : A Publication for Indian Americans in Florida

ACCOUNTING

ENTITY STRUCTURE FOR NEW BUSINESS

Sanjay Gupta, CPA, FCA

We hope that you are keeping yourself, your loved ones, and your community safe from COVID-19.

We have received so many calls and requests about what kind of business legal entity should be formed when incorporating a business. It is important to select the right type of entity because it affects your day-to-day business operations, business risks, liability, taxes and earnings. The most common business entities when starting a business are Corporation and Limited Liability Company (LLC).

Corporation is a legal entity that is separate from its owner. Shareholders are not personally responsible for any business liability and debts. The two most common types of corporations are C Corporations and S Corporations for federal and state income tax purposes. Generally, C corporations are taxed twice, business pays taxes at the corporate level and then shareholder again pays taxes on income received as dividends. Although it is “double taxation,” C Corporations can have unlimited shareholders, no restriction on ownership and stock classes, and more options to raise capital to grow the company.

On the other hand, corporation can elect as S Corporation which is a special tax status granted by the IRS that lets corporations pass their income, loss, deductions and credits to the shareholders with some restrictions. To be eligible for an S Corp, business must be a domestic corporation, cannot have more than 100 shareholders, shareholders must be individuals and the U.S. citizens or residents, only one class of stock, cannot be an ineligible corporation (financial institutions, insurance companies, and domestic international sales corporations), and must complete and submit Form 2553. The main advantage of S-Corp is that it helps the business to avoid double taxation and only taxed on owner’s personal income level. Owner working in S-Corp is considered an employee. You can minimize FICA tax obligation by paying a reasonable salary to yourself, and the business net profit could be taken as distribution, which subject to federal income tax only and not subject to FICA tax.

Another common business entity type is Limited Liability Company (LLC), it combines the tax flexibility of partnership and personal liability protection of Corporation. Owners (members) of LLC can be individuals, corporation, other LLCs, and foreign entities with no limitation on number of members. It offers pass-through taxation in which income and loss are taxed only on owner’s personal level.

LLC can choose to be taxed as Sole Proprietorship, Partnership, or Corporation depending on election made by the LLC and the number of members. If an LLC only has one member and does not elect to be treated as corporation, it is considered as a disregard entity that does not require to file federal corporate tax return but profit and loss need to be reported on Schedule C of owner’s personal tax return (Form 1040). The owner of a single member LLC is subject to tax on the net earnings from self-employment of the business. If an LLC has two or more members, its default classification is partnership for federal income purposes. But you can file a Form 8832 to elect as a C Corporation and file Form 2553 to elect as an S Corporation.

Here is the chart to help you understand the key facts of different business entities:

 

C CORP

S CORP

MULTI MEMBER LLC

SINGLE MEMBER LLC

LIMITED LIABILITY

YES

YES

YES

YES

SEPARATE LEGAL ENTITY

YES

YES

YES

YES

# OF SHAREHOLDER

UNLIMITED

LESS THAN 100

UNLIMITED

ONE

DOUBLE TAXATION

YES

NO

NO

NO

PASS THROUGH TAXATION

NO

YES

YES

YES

CORPORATE INCOME TAX

21% plus State Income Tax

NO

NO

NO

QBI DEDUCTION

NO

20% DEDUCTION

20% DEDUCTION

20% DEDUCTION

FICA TAX

7.65 % EMPLOYER 7.65% EMPLOYEE

7.65 % EMPLOYER 7.65% EMPLOYEE

7.65 % EMPLOYER 7.65% EMPLOYEE

7.65 % EMPLOYER 7.65% EMPLOYEE

 

On Salary only

On Reasonable Stockholder Compensation

Only. Not on K-1 Income

On entire net profit to General/Material Participation Partner

On entire net profit

TAX RETURN

1120 C

1120S

DEPEND ON ELECTION

SCHEDULE C OF 1040

Every taxpayer’s situation is different; therefore, you should talk to your tax adviser first before you incorporate or form a new business entity.

Sanjay Gupta, CPA, FCA, who has 30 years of experience in accounting and taxes is based in Plantation, can be reached at sanjayg@sanjayguptacpa.com or visit www.sanjayguptacpa.com



BUSINESS BUZZ

How to be Strategically Wicked

By Dr. Karyn Anjali
Mathura-Arthur

"If you are not floating or swimming, you are sinking."

It takes more than sheer will and gargantuan capital to survive the global marathon of the business world. With mega-companies getting swallowed into the vortex of anonymity due to feeble and wrong strategies, there is a far greater need to be “strategically wicked” in your business. Traditional linear processes – identifying the issue, gathering data, studying all the options, choosing one strategy – don't work with wicked problems. They instead demand social processes that constantly engage stakeholders, explore related issues, reevaluate the problem's definition, and reconsider the assumptions of stakeholders.

While the term ‘wicked’ has a lot to do with poor conduct both morally and socially, being strategically wicked on the hand refers to the ability to interpret and apply a high-rate, multi-faceted, boundless results from numerous and unselective data iterations and suggestions. To be strategically wicked means to attack problems that cannot be accurately understood by data alone.

Things you should know about being strategically wicked (solving a wicked problem)

Problems like these require separate parameters and multiple methods for solution. They are not necessarily tough to crack, but they present negative effects much like an 8-headed hydra.

Of course, problems like this generally end up needing to be calibrated with the compass of ‘good or bad’ as opposed to True or False. With Wicked problems, your solutions are only classified either as good or bad.

The complicated nature of 'wicked problems' means they are mostly a network of problems intertwined together as in a web. For every level you “win”, you discover other problems. Also, each of the problems is novel.

Tools that can help you to be strategically wicked

To achieve the high thought process associated with the analysis that trumps wicked problems, there are some qualities you should cultivate:

This is the ability to have deep insight into the relationship between different systems/models within a series. With this, you will be able to discover what business problems are bordering on “wicked problems”

It involves numerical analysis and visualization of problems that the business faces. This can help to improve a system model by employing collaborative/team efforts from stakeholders and players within the market. This method glorifies the need for raw, unpredictable input from humans.

Attaining strategic wicked (ness)

Executing these methods and tools above to solve wicked problems can be categorized into steps;

  1. Break down the information available into little chunks/groups that can be easily analyzed.

  2. Perform a critical introspection of the problem; this can involve breaking your team into smaller groups to tackle a problem

  3. Build on networks; this will provide you with fresh and radical perspectives in conquering the problems. Remember, there are no True or False solution to a wicked problem

  4. Encourage feedback from the solutions or models you propose for the problems: feedbacks and user replies are the best form of criticisms and inspirations you can get.

  5. Conduct multiple tests and scenarios for your model: Wicked problems are always multi-faceted; your solution will not be viable if it works on the singular aspect of the problem. Perform as many iterations until you get the desired outputs.

The art of being strategically wicked as a business strategist/ entrepreneur is non-negotiable, the market drifts from traditional modes by day, and business processes are no different. By being strategically wicked, you will seek to discover the deep factors not present in data, graphs, accounting sheets, and market projections.

Innovative leaders "use creative and lateral thinking techniques to transform their organization into a hotbed of entrepreneurial spirit brimming with new ideas." They manage change by focusing "on developing the skills of the team in innovation, creativity, risk taking and entrepreneurial endeavor." Being strategically wicked is just one approach to consider.

Dr. Karyn Mathura-Arthur is an agile implementation leader with experience in Operational Excellence, Continuous Process Improvement, Business Transformation, Process Engineering and Organizational Change Management across multiple industries (banking, insurance, healthcare, telecom, government, retail, etc.). For comments and suggestions, email editor@khaasbaat.com

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