Structuring Business Entities To Minimize Taxes

While it may seem unpatriotic to some, you are only required to pay the minimum amount of tax you owe under the tax laws.  Judge Learned Hand wrote in an oft-quoted tax case, “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”

One strategy for reducing corporate taxes is to adopt a foreign domicile in a country with a lower tax rate.  A popular country for doing this is the country of Ireland, where the top corporate tax rate ranges from 12.5% to 25%, depending on the type of income being taxed.  This compares to a top corporate tax rate of 35% (with certain tiers of income lever taxed as high as 39%).

Another strategy for minimizing you overall tax burden is to adopt a pass-through taxing structure for your business entity.  This strategy involves eliminating what is referred to as double taxation. It happens mostly at the closely held business level.  In double taxation, income is taxed first at the entity level, which is usually a corporation.  Then those profits are paid to the business owners, usually as a dividend, which are taxed again on the business owners’ individual tax returns.

There are certain elections and options that can be made on behalf of the business operating entity that can eliminate the taxes at the entity level.  Under these scenarios, the business income “passes through” to the business owners.  Those owners then pay taxes for that income on their own personal tax returns.  Thus the double taxation is eliminated and the overall tax burden is reduced.  There are also other strategies that can be used to help owners get income out of their business entity while minimizing the taxes on that income.

The interplay between tax strategies and business entity formation and governance is complex and involves many factors other than just tax considerations.  It requires the help of an attorney experienced in the tax and legal issues associated with business entity formation and governance.

If you own a business or are planning to start one and you want to minimize your overall tax burden for yourself and your business then schedule your free consultation by calling (480) 888-7111 or submit a web request here.