Best Business Entity Choices for Consultants
Starting a consulting business in California is becoming a more popular, and more lucrative choice for many East Bay residents. When deciding to start a consulting business, there are several legal considerations that should be considered and decided on from the start. The most important of these decisions involves which business form or entity is best suited for your consulting business and future goals.
Avoiding Personal Liability
First, anyone considering starting a consulting business – or any business, for that matter – should take precautions to protect their personal assets in the event of a lawsuit or bankruptcy. Under California law, the business entities that hold the owners or operators of a consulting business liable for all business debts include a sole proprietorship, a general partnership and, in a limited partnership, the general partner.
In a general partnership, where two or more individuals are engaged in a profit-making venture together – all partners are jointly and severally liable for all business debts of the partnership. In a limited partnership, there is a general partner who has unlimited personal liability for all business debts. In short, all of these business forms leave at least one person in a new consulting business exposed to personal liability.
Choosing the Best Tax Regime
Because California business law offers several business forms that allow a consultant to avoid personal liability on the debts of their new business – one real issue for consultants looking to start a new business is which tax structure best suits their business goals. In the simplest terms, California consultants will have several options including “disregarded status”, “partnership taxation”, “S” corporation taxation or “C” corporation taxation.
- Corporate Taxation. Beginning this year, the federal tax rate on corporations taxed as “C” corporations is now 21 percent – down from 35 percent just last year. Unfortunately, corporations taxed under the “C” option may be subject to a “double-taxation” where the corporate consulting business entity taxed as a “C” corporation would pay the entity tax when the business entity earned the money and then when the profits are distributed to the owners of the business, those profits are taxed again to the owners.
- “Pass-Through” Taxation Optons. Significant portions of business income in the United States is not taxed at the corporate tax rate. Instead, these businesses choose to utilize a “pass-through” taxation, where business income is treated as personal income to the owners of the business. Starting this year, some businesses will also see a reductions in their taxes for two reasons. First, some pass-through businesses will be able to deduct 20 percent of their business income, essentially allowing 20 percent of all business income in pass-through entities to go untaxed. Second, the personal rates have also been reduced. Business entities that avoid personal liability and still use “pass-through” taxation include limited liability companies taxed as partnerships and S” Corporations and corporations taxed as “S” corporations.
The lowering of the federal tax rates on businesses throughout the country may provide new incentives for aspiring consultants in Pleasanton, Oakland, Tracy and the greater East Bay area. Depending on the nature of the consulting business and its owner’s aspirations for their business, there is no “best” business entity choice for all consultants. To learn more about how to ensure your business operations are legally protected, contact the East Bay experts in business formation at JGPC Law.