Congress and the United States President recently signed into law a massive change to the U.S. tax system. While questions still swirl around the changes, such as the confusion regarding prepaying property taxes, recent analysis shows how the tax changes will affect business people.
Under the passed legislation, pass-through businesses stand to benefit greatly. Thus, individuals in high-paying professions are likely to organize or reorganize into a pass-through business entity. The most common pass-through business entity is the limited liability company, or LLC. Under the bill, pass-through businesses would be able to deduct up to 20 percent of their profits from their taxes. Thus, a pass-through single business owner who has profits of $100,000 would not pay taxes on as much as $20,000 of those profits under the plan.
While this obviously benefits those business owners who either are organized as pass-throughs, or will reorganize or form a new LLC, it also benefits small business owners and freelancers. A freelancer, or someone working in the gig economy, might wish to organize as an LLC in order to take advantage of this tax reduction. Most freelancers are not organized as any business entity, and likely do not even know the reasons why they should formally organize- namely, the benefits of limited liability- but this is yet another reason to organize as a pass-through. A limited liability company is inexpensive and fast to form, and easy to maintain on an ongoing basis.