Recap of Benefits with Multiple Entities
By Jason Watson, CPA
Posted Tuesday, July 6, 2021
Alright… we just explored some of the pains in the butts with a multi-entity structure. Let’s recap the benefits so you can value-assess the pros and cons.
Eat What You Kill
Some people soften this phrase to Eat What You Hunt. It makes no difference to us… the end result is the same. You want to ensure your efforts are rewarded appropriately however that is defined or calculated. A multi-entity arrangement allows for that while keeping your ownership percentage static. As mentioned previously, you can make tweaks with shareholder salaries to equalize or to provide an equitable outcome. Unfortunately, salaries can only do minor equalization tweaks without paying too much in Social Security and Medicare taxes.
Expenses and Fringe Benefits
You and your partner want to buy automobiles. Great! How much are we spending? Perhaps you want a small economic sedan and your partner wants the latest Ford-a-saurus. Sure, you could put a limit on the purchase amount where anything above that the partner or owner has to pay for separately. But what about maintenance? Or finance charges? Or registration fees? These additional expenses might be contingent on value.
Aside from automobiles, there are other fringe benefits that might be challenging. Partner A wants to insure his whole family. Partner B doesn’t need insurance. Partner A wants to buy a work laptop for home. Partner B already has a home setup. The list goes on and on, like a Journey song.
Having a multi-entity structure keeps fringe benefits from becoming political hot potatoes around the office.
Along the lines of fringe benefits comes reimbursements, and specifically Accountable Plan reimbursements (which we discuss in detail in a later chapter). Let’s say your home office is 250 square feet and your home is 2,500 square feet. That is 10% business use. But your partner lives in an apartment, and her business use percentage is 25%. But! You have a mortgage and property taxes, whereas your partner pays rent. How do we keep that equitable? Tough!
Similar to automobiles, we can establish a not-to-exceed reimbursement limit but doesn’t that hose the owner who has more expenses? It certainly does.
You fly first class and your partner slums it in economy. You want a new computer and your partner thinks a 486 is still the best. And if you know what a 486 is then you are certainly a product of the 90s. A multi-entity structure doesn’t necessarily solve all office politics, but it takes away some of the sting since you can spend what you want and get the maximum tax benefit without being crimped by your partner.
As mentioned earlier, if your business activities including the locations of the owners span multiple states, a multi-entity arrangement will allow for less state scrutiny. Yes, you will pay your fair share of income taxes to each state that you have nexus in, but the states will have limited visibility into your world without requesting an audit. Why give them something to bother themselves with unnecessarily?
We expand on this next.
Taxpayer’s Comprehensive Guide to LLCs and S Corps 2021-2022 Edition
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