This is not an endorsement for or against President Trump or his recently introduced 2017 Tax Proposal. It is simply a discussion of the effects of pass-through entities.
We’ve been encouraging business owners to create pass-through entities like a corporation or a limited liability company (LLC) for a long time. For example, way back in February 2011, I wrote a blog article entitled Not Incorporating is Risky Business. After six years, that article is still relevant more than ever. The benefits of limiting personal liability with a corporation or LLC cannot be overstated. Certain business debts can never be discharged, even in a bankruptcy: such as local and state civil fines and unpaid taxes.
We have clients who thought they were doing everything right, only to be fined for letting their license lapse or because the state disagreed with them on how they categorized certain sales, levying tens of thousands or hundreds of thousands of dollars of fines that can never be discharged.
If these clients had incurred these debts under the guise of a corporation or LLC, then those fines would attach to the business, not them personally. Instead, these clients suffered these fines doing business as a partnership and sole proprietorship — meaning that such debts and fines attach to them personally.
On Wednesday, April 26th, 2017, President Donald Trump may have created a new sense of urgency in incorporating or forming a LLC: Depending on whether or how his tax proposal is implemented, many pundits feel individuals with certain pass-through entities (i.e. such as LLC’s) may pay income tax as low as 15%. Read the NY Times article, Winners and Losers in the Trump Tax Plan, and the Fox Business article, Trump Tax Cut for ‘Pass-Through’ Businesses Spurs Debate.
If such an ambitious plan were to apply to the 2017 tax year, then only those business owners operating pass-through entities RIGHT NOW will stand to benefit. Those business owners operating as a sole proprietorship or partnership or other non-pass-through entity will not be able to take advantage of anything that may apply for the 2017 tax year, unless they switch over to a LLC or corporation very quickly. A LLC, for example, cannot earn income for any time prior to the date of its forming.
Because of this, we at Law 4 Small Business have seen an increase in the number of LLC formations we perform for clients. If you have tax questions, please consult with your CPA. If you have questions about LLC’s in general, or what entity may be best for you, please contact us.
If you think it’s time to form a LLC, visit our LLC Formation page for pricing and to get started right now.
Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later.
2 Comments
Question: Can a lawsuit from a previous business owner be passed onto the new owner since the DBA name is still the same even though the business was purchased through escrow?
Hi, Le.
Thank you for your question. The quick answer is “yes,” a successor in business can potentially be exposed to the liabilities of the business occurring prior to the date of purchase. We wrote a blog article about it, called Successor Liability — Even in an Asset Sale.
Good luck to you. Larry.