Here at Camuso CPA, we offer a wide array of tax services for construction and trades businesses including tax preparation, tax planning, accounting, controller and CFO services. If you are interested in how this might specifically benefit your business, please don’t hesitate to reach out in detail today to schedule a free initial consultation regarding your specific facts and circumstances.

One of the most important decisions you will make for your construction or trades business is the choice of legally entity structure. This will largely impact the management, compensation structure, tax planning and accounting systems you develop for your business. This can have a significant impact on the overall amount of taxes which your company will be liable. Additionally, this will have a large impact on your personal liability from both a tax and legal perspective.

This decision should be based on the current and future activities, opportunities, risks and performance of the business. Business owners should also consider the management structure, goals, and overall business objectives. Further considerations should also include various income, estate, employment, and other tax considerations. Each business form offers both advantages and disadvantages, so it’s important to choose the one that makes the most sense for you.

There are various types of entities. Common types include, but are not limited to, a C-Corporation, Sub chapter S-Corporation, general partnership, limited partnership, and limited liability company. Other choices include different types of trusts, real estate investment trusts, joint ventures and co-tenancies.

In certain situations, multiple entities may be utilized and different entities may be utilized together to maximize the advantages and minimize the disadvantages of one entity.

Below we provide a general overview of considerations for various legal entity structures. With any legal entity structure there are legal, tax and operational considerations to your decision.

One of the most comprehensive changes included in the recent tax law changes are the changes in tax accounting methods available for contractors. This is largely driven by your entity structure which we cover in separate articles.

Given the significant considerations involved in choosing the best entity structure, construction and trades business owners should consult with CPAs, business advisors, and legal counsel before forming or liquidating an entity.

There should also be annual review of the best business structures because the business performance, tax landscape, applicable laws, and specific facts and circumstances of each enterprise and its owners may change over time.

Limited Liability Companies

A limited liability company has the advantages of flexibility in utilizing a centralized or decentralized management structure, flexibility in allocating profits and losses to its members, limited liability to its members, and a single level of taxation.

The income, gains, deductions, and losses flow through to its members for income tax purposes. The single level of taxation applies whether or not the income is distributed to the members.

General or Limited Partnerships

A limited or general partnership has the advantages of flexibility in utilizing a centralized or decentralized management structure, flexibility in allocating profits and losses to its members, limited liability to some of its members, and a single level of taxation.

The income, gains, deductions, and losses flow through to its members for income tax purposes. The single level of taxation applies whether or not the income is distributed to the members.

The significant distinction between a general or limited partnership is that in a general partnership applies joint and several unlimited liability of the general partners. Each partner may be responsible for acts of the other general partners. In addition, there is no legal entity barrier by the general partners against the liabilities of the enterprise.

C-Corporations

A C corporation is taxed separately from its owners at corporate tax rates. This can result in double taxation.

Corporate income may be taxed once to the corporation and again to the shareholders when it is paid out as dividends or when the corporation liquidates. The corporation cannot deduct these dividend payments.

C-corporations can deduct reasonable compensation paid to the business owners. Ordinary and necessary business-related expenses are also fully deductible.

It is very common to see small businesses that utilize this structure to pay out all or most of their net income to the owners as compensation, especially if the owners’ top personal tax rate is lower than the corporation’s rate. 

S-Corporations

An S corporation is a pass-through entity. Income, losses, deductions and credits pass through to business owners to be reported on their federal tax returns similar to a partnership. This means that S corporation income generally is taxed only once.

An S corporation is subject to certain special benefits, risks and costs that are not available, or applicable, to regular corporations for tax purposes.

S-Corporations are subject to many special rules to properly maintain this structure with the IRS related to reasonable compensation, stock classes, shareholders among other rules outside the scope of this article.

The recent tax law changes created many new considerations for C Corporation and S Corporation tax rules

There are scenarios when a corporate tax structure may be the most tax efficient entity type if a large portion of earnings are not being distributed to owners but are being retained in the company for  growth or debt repayment.

There are many considerations to this decision which are outside the scope of this article including considerations related to the QBI Deduction, historical earnings, current taxation structure, future plans for owner distributions, future plans to  sell business, current gains held within entities and permeance of any entity changes due to regulations.

Combination Of Entities

There are many circumstances in which a specific type of entity will provide all the benefits that the owners or managers prefer without significant risks or costs. In some cases, multiple types of entities may be utilized to allow benefits with less significant risks and costs. In some cases, multiple entities should be used rather than one entity in order to separate assets for business, liability, and tax considerations.

Choosing the right business form for your business isn’t an easy decision, but it is vital to your business and financial success

Here at Camuso CPA, we do have the ability to planning services for our construction and trades business owners which can assist you with your entity structure to ensure this is optimized from a tax perspective.

If you are interested into how this might benefit your business, please don’t hesitate to give us a call today. One of our friendly and knowledgeable representatives will be happy to answer any questions you have.