At the recent 360 Business Vision forum organized by the International Chamber of Commerce of Entrepreneurs IECCUS in Miami, Isabel M Baca, a renowned IRS-registered tax preparer associated with Bacas Accounting Inc., shared her expertise in an enlightening session on corporate structures and tax strategies for entrepreneurs and small businesses. This article aims to break down and delve deeper into the points addressed by Isabel, providing a comprehensive view for those looking to optimize their tax burden without resorting to tax evasion.
Based in Miami, FL, Isabel M Baca stands out not only for her participation in the forum but also for her extensive professional journey assisting taxpayers and small business owners with tax preparation and planning. As a participant in the IRS’s Annual Filing Season Program, Isabel has surpassed the requirements for annual tax update education, enabling her to represent clients whose returns she has prepared and signed. This level of accreditation underscores Isabel’s ability to offer not just advice but also representation before the IRS, adding an extra layer of trust and security for her clients.
The Three Main Corporate Structures
Isabel Baca began her presentation by highlighting the importance of choosing the appropriate corporate structure to legally minimize the tax burden. The three main structures mentioned were:
- Regular Corporation (C Corporation): This type of entity offers specific features and limits. Although it allows a clear separation between the owners and the corporation, it entails double taxation. First, the corporation pays taxes on its earnings, and then, the owners pay taxes on the dividends received. This structure is beneficial for companies planning to reinvest their profits rather than distribute them.
- S Corporation (Line Company): An attractive alternative for small businesses looking to avoid double taxation. The S Corporation allows profits and losses to pass directly to the owners, who report them on their tax returns. This mechanism avoids the double taxation present in C Corporations but requires compliance with certain criteria, including that the owners be legal residents.
- Limited Liability Company (LLC): The most flexible and favorable option for many due to its tax treatment and liability protection. An LLC’s income is passed to the owners, who report it on their personal tax returns, thus avoiding double taxation. However, certain entities like banks and insurance companies cannot be established as an LLC.
Tax Strategies and Considerations
Isabel Baca emphasized that beyond choosing the structure, understanding the tax implications of each is crucial. For example, C Corporations face a tax rate that varies between 1% and 21% until the year 2026, but they also offer the possibility of deducting business expenses before the distribution of profits. In contrast, owners of S Corporations and LLCs must be prepared to handle the flow of profits and losses on their returns, which can affect their overall tax rate.
Isabel also addressed the topic of Social Security and Medicare contributions, highlighting that members of an LLC are subject to a self-employment tax of 15.3% on the company’s net earnings. This is an important consideration for those looking to maximize their tax savings.
Informed Decisions for Business Prosperity
Choosing the right corporate structure is a fundamental decision that can significantly influence the financial health and long-term growth of a business. Isabel Baca concluded her presentation by reminding attendees of the importance of seeking proper advice and considering all tax variables before making a decision. The right tax strategy not only minimizes the tax burden but also aligns business practices with long-term goals, ensuring a solid foundation for business success.
Final Thoughts
Isabel M Baca‘s session at the 360 Business Vision forum offered valuable insights into how corporate structures can be optimized to benefit entrepreneurs and small businesses. The choice between a C Corporation, an S Corporation, and an LLC depends on multiple factors, including the size of the business, growth plans, and the personal tax preferences of the owners. In this complex tax landscape, guidance from experts like Isabel is indispensable for navigating successfully and making informed decisions. With her deep knowledge and experience, Isabel Baca stands as a key figure in Miami’s tax arena, offering a beacon of clarity and confidence for entrepreneurs seeking tax optimization.
Transcript
In just a few minutes, I will explain the three most commonly used companies not for tax evasion, but to minimize the tax burden. Depending on the type of company each one needs to have, we will choose the most convenient one. There are many, but the three main ones are Regular Corp, which is a C Corporation with certain particularities and limits.
The next is Line Company, known as S Corporation, the most well-known and famous. It is important to know how to differentiate one from the other. Regular Corp is registered in the corporation’s division and is considered a corporation as such.
This type of corporation pays taxes twice. Why? Because it pays taxes on the company’s earnings at the end of the year, with a rate that varies from 1% to 21% until the year 2026. In addition, any remaining profit that the company’s owners distribute the following year will be considered personal income, so they will have to pay taxes on it according to the scale corresponding to their tax situation.
On the other hand, some people prefer the 1120S, designed only for residents. They must be legally in the country to qualify. This type of corporation does not pay taxes at the corporate level. Profits or losses are reported on the personal tax return of the owners through Form K1.
The LLC is the most favorable for many, but the owners of an LLC must pay taxes on the company’s income on their tax return. However, certain entities, such as banks and insurance companies, cannot opt for an LLC. It is important to remind members of an LLC that, although they receive guaranteed payments, they cannot take advantage of certain tax benefits to reduce their obligations concerning Social Security and Medicare, which represent 15.3% of the contributions by both parties.
In summary, this guidance is to help you choose the most convenient type of company. I wish you a good night and thank you very much.
Thank you.