Daniel HonanFounder, Profitable Painter CPA PLLC · I help painting contractors increase profits & cash flow while reducing taxes♦ Bookkeeping ♦ Tax

Painting Business Owners: Stay informed about Tax Entities to know when you should pivot.

Name: Painting Business Owners: Stay informed about Tax Entities to know when you should pivot.
Uploaded: 2023-09-25T14:54:50+00:00
Duration: 59 s
Channel: Daniel Honan
Description: In this instructional segment, the speaker clarifies the two separate concepts that affect a small business’s tax situation: the legal business entity…

25 Sept 2023 · 1 min

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In this instructional segment, the speaker clarifies the two separate concepts that affect a small business’s tax situation: the legal business entity and the tax election applied to that entity. Three primary entities are outlined—sole proprietorship, limited liability company (LLC), and corporation—each created under state law. The speaker explains how each entity is taxed: a sole proprietor files business income on Schedule C as a disregarded entity; an LLC can start as a disregarded entity but may later elect corporate taxation, typically as an S‑corporation; a corporation can choose either S‑corp or C‑corp tax treatment. The key takeaway emphasized is that an “S corp” is not a distinct legal entity but a tax classification that can be applied to an LLC or a corporation. The speaker recommends new LLC owners begin with the default disregarded status and consider electing S‑corp taxation as the business grows.

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There's two things at play here. You have your business entity and then you have your taxation type. So your business entity could be just you yourself as a sole proprietor. It could be a limited liability company that's formed under your state or an LLC, or it could be a corporation that's incorporated in your state. Those are three different business entities. Now, depending on the type of business entity you have, you have options as far as your taxation goes. A sole proprietor is going to be taxed as a disregarded entity. That means they're gonna be reporting their business profits on a Schedule C when they file their Form 1040. LLC has more options. LLC can be a disregarded entity, and most people when they're starting out, that's what they're going to do. That's, that's what we would recommend. But as that LLC grows, it might choose to be taxed as a corporation, specifically an S corporation. Same thing with a corporation business entity. That corporation might elect to have S corporation taxation, or it might elect to have regular or C corporation taxation. But the key takeaway is that your business entity is separate from your taxation type. So there really is no such thing as an S corp. There's LLCs, there's corporations, and then there's S corp taxation. So when I say elect S corp taxation, I like to use those words because, you know, that could be your LLC, it could be your corporation. It's just a flavor of taxation, and it's not an entity in its own right.