In early 2012 I posted a blog on a change I had made in my business structure. Specifically, I closed the LLC and changed to a C Corp. That blog garnered a lot of good comments, as many advisors were interested in reducing their own tax burden. That year, 2012, was the first in which I filed as a C Corp and 2013 will be the second. Now that I have had some time under the new structure, I thought I’d reveal the results. But first, a brief background is in order.
When I became an independent RIA in April 2007, I established my business as an LLC with my wife as partner. After a few years of building a revenue stream, I was beginning to feel the tax bite. Hence, I felt the need to find some way to reduce it. In retrospect, there were two good options available to me, although at the time, I only considered one. For example, I could have remained an LLC and filed my federal return as an S Corp. This would have allowed me to receive a salary, which would have been taxed as ordinary income, plus distributions, which would have been taxed at the favorable capital gains tax rates. Again, this would have been a good option, but I elected to change the business to a C Corp instead.
Before I continue, there’s one point that needs to be made. In Louisiana, and perhaps in all states, though I’m not positive about this, when you create an LLC with a spouse, the LLC is considered a “disregarded entity.” Hence, all income, after deductions, flowed to our joint tax return. The problem was that in our progressive tax system, our income soon reached the higher marginal brackets. My goal was to spread out the income.
My thesis was that a majority of U.S. mega-companies are C Corporations. Therefore, I assumed because of the enormous lobbying strength of these mammoth organizations, there would be more tax benefits available. Another factor in the decision was that a C Corp is taxed at 15% on the first $50,000 of taxable income. Therefore, as long as I could keep the C Corp income under this threshold, and my personal income in a lower marginal bracket, it should result in less federal tax.
The bottom line you ask? My total income tax, with approximately the same income (year/year), was reduced by nearly 50% as a result of this change. Needless to say, I am very happy I did it.