In our third of five articles highlighting a total of ten good reasons to set up a business entity, today we talk about 
legal requirements and the ability to buy and/or depreciate assets you might normally use.
1.Legal Requirements. In most cases, small business owners are allowed to choose they type of entity they want to be, whether it be a limited partnership, general partnership, sole proprietorship, corporation or LLC. However, under the California Corporations Code some professions are controlled by licensing boards that prohibit the company from being an LLC. These are notably in the health care fields, such as doctors, dentists, acupuncturists, nurse practitioners, physical therapists, chiropractors, and veterinarians, to name a few. Also restricted in the non-medical field are lawyers and accountants. See California Corporations Code13401 et seq. for a complete list of professions that must be a professional corporation if choosing between an LLC and a corporation. Most of these may also have a limited liability form of partnership structure if that is what the business partners want.
2.Ability To Buy And/or Depreciate Assets. Having a business entity allows you to buy assets you might otherwise buy, such as a truck or computer equipment, which, if used in your business, will allow you to depreciate the asset over time, or depending on the purchase price of the asset, to expense it in the same year in which you purchased it. Let’s say, for example, you need a car or truck to deliver goods from your business. If you buy a pre-owned truck for $25,000 for business purposes, and its expected useful life is 5 years, in most cases the IRS will let you depreciate the expenditure over the useful life of the item. In this case, you could depreciate the value of the truck by $5,000 each year ($25,000/5 years= $5,000), which offsets $5,000 of income on which you would normally pay taxes. At a 35% tax rate this would save you $1,750 in taxes every year for 5 years.
Your tax advisor can tell you which assets can be expensed (the entire purchase price is deducted in one year) versus which can be depreciated (you deduct the purchase price over its expected life), so as to offset income and lower your taxes on your business. In some cases, you may be required to depreciate the asset by a percentage of use formula. So if you use the truck 80% for business and 20% for personal use, you may only get to deduct $4,000/year in depreciation, using our example above ($5,000/yr. x 80% business use= $4,000/year). Before buying or leasing an expensive vehicle or equipment, check with your tax advisor to see which tax mode will be used for the IRS. If you finance the purchase with a loan, the interest you pay may also be deductible, offsetting more income taxes.
Our next article discusses two more good reasons to set up a business entity. Stay tuned.
Thinking of setting up a business entity? Call Nancy at 415-399-0993 to determine which business type is right for you. There is no charge for the consultation. Mention this article and get a free copy of Nancy’s “10 Commandments for Small Business Success.”