The failure of the American Healthcare Act has placed a bright spotlight on the Trump administration’s next legislative initiative.
Under any tax regime, entity selection is a crucial step in starting a business, responding to changes in tax law, or other economic factors. With significant changes comes the need for businesses to reconsider the alignment of their entities to ensure maximum benefit from tax reforms.
While significant in entity selection, tax reform is only one of many determinations in choosing a business structure. Others include:
- Liability issues
- Access to capital
- Nature and number of owners
- Social Security and Medicare taxes
- Accounting restrictions
- Owner’s payment of company expenses
- Tax filing deadlines and extensions
- Multistate operations
- Exit strategies
One of the business entities that could benefit most from change is the C corporation.
S corporations, once on the rise, may become an ill-timed choice upon the enactment of tax reform. With multiple proposals calling for a dramatic cut in the corporation tax rate and the elimination of double taxation, C corps may become a more favored selection.
LLCs are a popular choice due to the personal liability protection provided to owners. However, proposed lower tax rates and additional health insurance along with other deductions could also give rise to those entities changing to C corps.
Even tax reform proposals that do not change the double taxation of C-corps’ may still tip the balance more to that entity due to overall lower tax rates and deductions not available to S corps or LLCs.