Organization can mean different things from an accounting perspective. Most people would think it refers to how well you keep up with your receipts and tax docs. It does mean that but not in this post. In this post we are talking about how your business is organized, meaning, how it is setup and structured.
You may think, what is it the point of that? I have the next great industry disrupting doo-dad with orders to fill. Awesome. But how you have your business structure setup can have huge tax impacts now and in the future, depending on what you are doing.
One of the biggest reasons to organize your business is for protection. Certain types of entities (Corporations and Limited Liability Companies) can provide liability protection for you as the business owner. What is liability protection? Well, if someone gets hurt using your new doo-dad and they initiate legal action, in theory, your entity acts like Dikembe Mutombo protecting the rim and will protect your personal assets from creditors looking for restitution.
(Yes, I know that’s not Dikembe)
Thats a legal thing though and you may want to talk to an attorney about more details. Sometimes you can accomplish similar things using insurance.
There are multiple options to choose from: Sole Proprietorship, General Partnership, LLC, or Corporation. LLCs are can serve a lot of different functions if you are looking for flexibility, but taxation can get pretty tricky pretty quickly if you are operating in multiple states or trying to being in new capital. Corporations can be simpler but they aren’t as flexible and can subject your income to being taxed twice if you don’t plan properly.
Different entities fit different purposes. Right now, the top corporate rate is lower that the top individual rates, but that doesn’t mean you should automatically choose a corporation as your business structure. It is definitely a better fit than it used to be but if you get tripped up and get your income double taxed, the rate won’t be lower at all. There isn’t a one size fits all recommendation. Be sure to do your homework.