“My accountant says I need to set up a ….”

It’s that time of year: meeting with your CPA to do your taxes. She probably had some suggestions for you about how to better track your expenses, and if you are a business owner, may have suggested that you set up an entity to own the business, such as a limited liability company or a corporation. For certain businesses, there can be tax benefits to doing so. I leave that specific advice to your CPA.

As you wade into this subject, the terminology can be confusing. It is important to understand that legal entities are formed under state law, and then depending on the characteristics of the entity, may qualify for treatment as a certain type of entity under the rules and regulations of the Internal Revenue Service. There is some overlap in terminology that can lead to confusion.

Under South Dakota state law, we assist clients with forming corporations, limited liability companies, and partnerships. We work with clients’ tax advisors to choose an entity that not only fits the client’s needs for maximizing tax benefits, but also creates the structure of ownership and management for the business. It is important to understand that a corporation created under South Dakota law can elect with the IRS to be taxed either as a C-corporation (a “C-corp” – so-called because it falls under subchapter C of the Internal Revenue Code) or as an S-corporation (an “S-corp” – so-called because it is formed under subchapter S of the Code). But a limited liability company (“LLC”) formed under South Dakota state laws can also elect to be treated as an S-corp. For state law purposes, it is an LLC, but for IRS purposes it is a corporation. However, as a default rule with the IRS, an LLC will be taxed either as a partnership or a sole-proprietorship depending on the number of member owners. The entity must make a special election within a limited period of time with the IRS in order to be an LLC taxed as an S-corp.

If your accountant has told you that you should set up an entity for your business, come talk to the attorneys at Lynn Jackson. We work with your tax advisors to set up an entity under South Dakota laws to meet your business planning and tax needs, and we provide the on-going advice and planning to keep your entity in good standing and working for you for the long term. Just let your accountant finish up with tax season first.

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