There are many types of Professional Service Firms such as medical, legal, accounting engineering, architectural, marketing, and various consultants. They have various choices in the type of business entity to use which can be taxed as a Sole Proprietorship, S-Corporation, C-Corporation, or Partnership.
If the firm is owned by an individual or married couple with no other professional employees of independent contractors, the S Corporation is quite efficient. This is because, in general, the owners file a single personal income tax return.
When the owners of the firm file separate personal income tax returns or has other professionals working for it, the most tax efficient entity is one that is taxed as a partnership. The problem with these firms operating as a S-Corporation are:
• It is inflexible in that distributed profits are allocated based on stock ownership.
• Individual production bonuses need to be taken as additional W-2 wages.
• Discretionary tax deductions taken on the business tax return for the benefit of one owner effects the other owners. This limits the legitimate tax deductions taken because the other owners need to approve them and would be affected if they were disallowed by tax authorities.
The problem with C Corporations is double taxation on dividends, so all income paid out to the owners are taken out as fully taxable salaries.
The partnership structure, which can be an LLC, PLLC or general partnership depending on state law, is the safest, proven structure to achieve tax efficiencies. It benefits the owners and can benefit the professional staff as well. Other professionals can become partners in the firm with limitations of ownership, equity and compensation. It eliminates the independent contractors vs. W-2 employee question. These items are set forth in the partnership agreement which can allow for various classes of partners. Common names for various types of partners are Senior Partners, Managing Partners, Junior Partners, Defined Equity Partners, or Non-Equity Partners.
The firm would only pay for direct expenses that are considered proper to be shared by all partners. Partners would receive payments for services they perform and an allocation of profits to be distributed. Discretionary expenses of the individual partners would be paid by the partner.
Employee Benefits such as insurance, retirement, auto allowances, etc. can be negotiated on a firm wide basis with the costs born by the firm or allocated to the individual partners. The partners can choose to hold their partnership interest as individuals or be a S Corporation they own. This structure allows the partner to make their own decisions on what to expense through their individual S-Corporations and it would have no effect on the partnership or the other partners.
The existing firm’s tax and legal structure can be converted to an entity that can be taxed as a partnership. Conversion is a process which allows the entity to keep the same tax numbers and existing contracts and agreements if force. It merely changes the tax structure.
American Dream CPA is available to more fully explain to you and assist you in the conversion. The sooner the restructuring is completed, the sooner taxes can be saved. Saving taxes and improving the lives of our clients, is what we are most passionate about.
Our expertise and efficiency allow us to charge reasonable costs. Call now so we can review your situation and make specific recommendations to improve your quality of life. You will be grateful for having engaged our services.
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Protect, Preserve and Prosper
Professional Service Firms face many challenges and pressures which are only increasing. The tax system creates the second-greatest obstacle to attaining the American Dream. The greatest obstacle is the limitations we place on ourselves. A self-imposed punitive tax structure is counterproductive and is a disincentive to increased productivity. When we look at tax efficiency, we must look at income taxes and payroll taxes. Stop being a victim!
— Adrian Keith Skane, Senior Partner, CPA