Entity Formation Services…

As you may have determined from other parts of this website, The Part-Time CFO, Inc. is primarily a Business Management and Tax Preparation Service practice. As such, while “Entity Formation” may (to some) be a legal service, The Part-Time CFO, Inc., while not providing legal advice, offers guidance regarding “Entity Formation” from a tax perspective only.

How an Entity Formation Has a Positive Financial Impact

This tax perspective centers on avoiding excessive Self-Employment Tax.

While not specifically understood by every employee, when Social Security and Medicare Tax is withheld from their paycheck (7.65%), their employer is taxed equally for both taxes. When you are “self-employed,” you are both the employer and the employee. Thus, the combined tax is 15.3%. This tax is assessed on every dollar of a sole-proprietor’s and partner’s (in a partnership) profit, subject to the Social Security limit ($142,800 in 2021).

To emphasize the impact of this tax, for an individual (W-2 employee), taxable income is determined by taking their gross earnings, subtracting deductions (and exemptions) and a few other “tax preference” items. Thus, for a married couple earning $55,000 with a standard deduction of $24,800, the income tax would be $2,578 or 4.7% of their gross income ($55,000). Thus, if the $55,000 were to be the profit on a sole-proprietor, the income tax would be the same $2,578, plus $8,415.00 in self employment tax.

Our Approach to Pursue Tax Benefits

Our approach is to pursue the tax benefits of an S Corporation – an entity with income being exempt from self-employment tax, and in the above example, saving roughly $4,200 each year (assuming the same income). There are offsetting expenses (i.e. Setup, Franchise Fees, additional Tax Preparation), but generally for a sole proprietor earning $25,000 or more, taxation as an S Corporation is generally justified (financially).

The process of forming a Limited Liability Company or Corporation (in California) amounts to filling out a relatively short form (and knowing what you’re doing). While we don’t recommend doing it yourself, if you prefer that we do it, we charge $500 (in California) including the filing fees – payable in advance.

Fees vary by state, but if you need an entity formed in another state, call or email us and we’ll give you a quote.

Legal advice if required should be sought from a licensed attorney.