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Entity formation and tax implications

by | Feb 2, 2022 | Business Formation

A person needs a business idea and plan before creating a business entity. Selecting a business entity is complex since there are multiple types. Each business entity has its own set of tax advantages in New York, New York. The right plan can save the new business money in the long run.


An outside general business counsel can help a new business decide on the best business entity for longevity. A C-Corp is a common business entity that offers several tax benefits to its shareholders and members. Corporate shareholders don’t pay taxes on the income but their dividends. The type of taxes depends on whether they’re short-term or long-term. Corporate taxes went down from 35% to 21% in 2018. Capital gain less than $78,750 is 0%, but capital gains over have a 20% tax rate. As of 2020, more states have made corporate tax rate cuts, which means a C-Corp will pay fewer state corporate taxes.


LLCs offer flexibility with taxes, which is the primary benefit. LLCs can be for single-member businesses or multiple-member businesses. The IRS considers a single-member LLC a disregarded entity because the LLC is separate from the owner for tax purposes. Members of a multiple-member LLC can elect to tax the business as a partnership, S-Corp or Sole proprietorship.


A partnership business entity offers several tax benefits for the partners. Healthcare Tax Credits are available for the partners, and there are tax deductions for premiums. The tax credits can be for a maximum of 35% of the contributed amount for individual premiums for employees. Other tax deductions include a SEP-IRA.

S-Corp and Sole Proprietorship

Members of an S-Corp will have pass-through taxation, which means shareholders will pay their share of federal income taxes. Shareholders can qualify for income deductions. As of 2018, they can apply for a Qualified Business Income Deduction, which allows a deduction for a maximum of 20%. Sole proprietorships can get tax deductions but use a Schedule C for the details. Deductions include business operations, business training and costs of goods sold. There are tax deductions for health premiums and their SEP-IRA. Sole proprietors have small business expense deductions such as home office space costs.

Entity formation is important for taxes and the longevity of the business. An outside general business counsel can help determine which entity would fit the business model. While tax forms are a priority, healthcare premiums and business deductions are important too.