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How may proposed tax changes influence my business entity form?

People in New Jersey and across the nation who have a business or are considering a business start-up have been watching the debate about changes to the tax code with a close eye. The changes, if they are completed, will fundamentally alter how business is done everywhere. While it can be confusing, there are some issues that should be fully understood and they can affect people who are in business or are planning a business. Although there will be a reduction in taxes for small businesses, it is not necessarily prudent to form a corporation yet.

Big businesses are poised to get a break, but so are small businesses. S-corporations and limited liability companies (LLCs) will also benefit. Also referred to as "pass-throughs," these companies go straight to the owner who will deal with the individual tax rate. This can be inordinately high. With the new bill from the U.S. Senate, 23 percent of the income will be deductible. People should be aware of the pluses and minuses of the business entities they choose. LLCs are useful because they shield owners from asset seizure. For taxes, the IRS must be told that the business has a certain entity formation.

S-corps are useful for businesses that profit a certain amount after expenses. With LLCs and S-corps, accurate and vigilant bookkeeping is a necessity since there are two tax returns that are filed annually - the individual's and the company's. A payroll company will be a must with an S-corp and LLCs as it is vital to make certain that employees get paid and the taxes are deducted.

Complicating this matter further is the ongoing debate about the Senate's tax law and how much it could change after it heads back to the House or Representatives and there is an attempt made to form a comprehensive bill that enough members support and can be signed by the president. Before taking too literally news reports about the positives that pass-through entities will derive from the new tax code, a legal professional can provide advice on which business formation is preferable for every situation.

Source: cnbc.com, "Pass-throughs save under GOP tax reform: Here's how to join their ranks," Darla Mercado, Dec. 4, 2017

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