February 5/12, 2018: Volume 33, Issue 17
By Bart Basi
(Second of two parts)
In my previous column, I broached the subject of the passage of the Tax Cuts and Jobs Act—also referred to as the Tax Reform Bill—and what the changes mean for small businesses and retailers in the floor covering space. In this installment, I will delve deeper into the benefits of the law relative to how a business is structured.
One of the biggest changes in the law relate to Subchapter S corporations. (Most of my clients in the flooring space are Subchapter S.) If a business is registered as a Subchapter S corporation or a partnership 20% of an income calculation (not 20% of profits) is not subject to tax.
What that means is, if a large company is a Subchapter S corporation, then its taxes essentially decrease from 35% to approximately 29.7%. (Note: This is the maximum rate—it could actually be lower than 29% but it will never be less than 21%.) It’s still higher than a C corporation (21%), but it does help small businesses that are Subchapter S corporations or partnerships that want to stay as they are.
But what happens if you’re not classified as a Subchapter S corporation or partnership? For example, take limited liability corporations, or LLCs, which, are still very popular with people mainly because there is no tax rate applicable in the U.S. for LLCs. Accountants who advise business owners who operate under this structure ask that owners make a choice between paying taxes as an individual proprietor of a Schedule C, a Subchapter S, partnership or C corporation. In other words, the federal government states that if you are an LLC, the accountant is supposed to check a box that essentially says, ‘We are a limited liability company but we’re going to pay taxes as…” At which point the owner of the business files the appropriate tax return. Remember: There’s no such thing as a tax return for an LLC.
But it’s important that small businesses operating as an LLC remember they cannot use anything other than the letters “LLC” when referring to their company. Also, the letters LLC must appear on every single document in order to enjoy the protection it affords. The law states that if you operate as an LLC, then you must notify every single person you deal with—right down to the stationery, business cards, invoices and even truck signage you use. Otherwise, a third party can sue you personally because you haven’t shown that person—as a customer—that you’re an LLC. Note: A lot of people in the flooring business use a “dba” (or doing business as) designation. Warning: LLCs cannot use dbas; they will lose the legal protection of the LLC if they use the dba. Many flooring retailers who operate under this classification are not aware of the rule.
It’s also important to note some of the laws regarding LLCs are changing; specifically, a proprietor of an LLC can longer have an individual listed as an owner. There must be two people on file as owning the company, or else the government will claim it’s a de facto company and therefore defaults the company to a Schedule C on the tax return. This means everything will be taxed, including social security.
LLCs are good as long as people understand three things: 1) make sure the accountant knows which tax return you intend to file, i.e., “check the box”; 2) do not use a dba; and 3) make sure the state in which you are incorporated allows one person to own an LLC and still be a legitimate company.