Monday, August 08, 2005

Take A Load Off

Today's blog is gonna be short. My teething six-month-old son (my wife and I suspect he's teething) and I haven't slept since Friday and I am just about to run short of steam. He seems to be doing just fine though.

At any rate, today's topic is: "What is the best type of business form for my firm?"

Small/solo practitioners are not as limited as you might think when it comes to creative business formation solutions. Some stick to classic sole proprietorship, while others go the partnership route. Still others go a little more exotic and try the PLLC or P.A. architecture.

Whatever the reasons for choosing a type of business structure, your choice should always be guided by the core principle of: "What will enable me to make the most amount of money?" Accordingly, this core principle can be broken down into two subgroups:

  • How do I limit my own liability?
  • How do I (legally) avoid the tax man?

Believe it or not, these two goals do not always work hand in hand. For starters, we must assume as axiomatic that the tax man is always going to get some slice of your pie. Therefore the goal is to limit the size of that slice. Further complicating things are the rules of professional ethics which limit the ability of attorneys to engage in more exotic business schemes that would potentially interfere with servicing clients.

A PLLC offers small/solo practitioners the nifty tax treatment (no double taxation) of a partnership while shielding its members from liability like a corporation does. However, a PLLC does not allow its members to be employed by the firm and requires them to take distributions subject to heavy-handed "self-employment" taxes which, in some jurisdictions, can be as high as 55%!

A P.A. with a sub-chapter "S" election may be a better alternative for some: It has limited liability and can employ its own shareholders while avoiding the dreaded corporate double-tax. However, salaried employees are still subjected to the same payroll withholding as before.

Sound confusing? It is - even for attorneys. The key then is to carefully analyze how and when you want to take distributions/salary and consult an experienced CPA/tax professional when making a decision. Doing so will make sure that you enjoy the most of your labors and avoid the pitfalls of taxation and liability.


Blogger Sunny said...

Just found your blog. I'll have to come back to it to explore.

Solo in Melbourne, FL. real esate, wills, trusts, probate.


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