Courtesy of Whittemore, Dowen, Ricciardelli
By Susan Elise Campbell
Year-end may be a good time to consider restructuring a small business to shield personal assets from potential liabilities.
The tax code allows for several options, according to Paul Dowen, CPA, and partner at Whittemore, Dowen & Ricciardelli, LLP, certified public accountants serving the North Country and Saratoga County. Dowen said the typical choice today is between a limited liability company (LLC) or a Subchapter S corporation (S corp), although there are other entities.
Both provide some protection for the owner by limiting personal liability, just as a corporation does. If the company has debt or other financial obligations, owners are not personally responsible for satisfying them.
“In a retail store or restaurant with people coming in and out of the building, you might have product liability,” he said. “Both LLCs and S corps give you some protection.”
“The confusion is that an LLC can be organized as a sole proprietorship, a partnership, a C corp or an S corp,” he said. “If a client tells me their business has been set up by the attorney as an LLC, I know there is some liability protection, but that doesn’t tell me how the company is being taxed.”
Dowen explained that LLCs have been around only a few decades. They exist by state regulation and blend together some of the features of corporations, partnerships and sole proprietorships.
LLCs do not pay corporate tax on profits, but pass through income to the owners, who report their share on their individual returns using the documents received from the partnership. But that means 100 percent of those earnings are subject to social security and medicare taxes.
