Picking the least-taxing business structure
Forming a corporate entity can be financially and legally advantageous, but check out tax and insurance considerations first, the experts advise.
Jennifer, Flagler Beach, Fla.
I am a licensed professional (a mental-health counselor) doing contract work paid under a 1099, for tax purposes. Can I remain self-employed, or do I need to set up as a professional association, an LLC or a corporation? Are the tax rates different?
By Herman Wong, Fortune Small Business contributor
Dear Jennifer: Nothing beats being your own boss. However, there are myriad legal and tax issues to consider when going it alone, and a more sophisticated business structure can be advantageous for several reasons.
For example, there’s the question of liability. Counselors must carry liability insurance for healthcare providers in the event of a claim by a client, says George Drobinski, president of the Florida Mental Health Counselors Association. But “designating yourself a [professional association] or a limited-liability corporation is wise, as it will provide a buffer of protection to her personally from the actions and debts of the corporation,” he says. Such an entity absorbs some, though not all, of the litigation risks.
On the tax side, self-employment tax is the same as Social Security and Medicare, so no matter what business form you choose you will pay the equivalent of 15.3%, says Gene Fairbrother, lead small-business advisor for the National Association of the Self-Employed. A corporation could help distribute business profits that are less taxing, but there are numerous factors to work out. Complex tax issues with professional associations probably make them a less attractive option, Fairbrother says. You will need professional counsel before choosing.
The cost of maintaining a separate corporation or LLC is not insignificant, says Grafton ‘Cap’ Willey of accounting and consulting firm Tofias PC. Corporations must file a separate corporate tax and payroll returns and W-2s. Some states have minimum taxes and filing fees for corporations of LLCs that run as much as $1,000.
Consult with a legal and tax expert to crunch the numbers and find the most suitable vehicle.
“The key is that before anyone decides on their legal structure, they need to closely evaluate their tax positioning,” Fairbrother says.
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