How should I structure my business with multiple owners?

Posted on July 08, 2020

We often times get business owners that reach out to us that have multiple owners in their company, wondering what the best way is to structure their business.

In this specific article we are assuming an S Corp structure is desired prior to it reaching the owners personal tax return. If you don’t know what an S Corp is, we will dig into that in future post but in a nut shell it is a tax strategy to help limit the amount paid in self employment taxes.

With that assumption there are two main options we typically suggest. Note that this also assumes that all owners are going to be active within the business (not just silent investors).

Option 1

Setup company as an S Corporation with each owner as a shareholder in the business personally.

  • Advantages
    • One company, one tax return, one payroll account
    • Easier to setup and less maintenance
    • Cheaper
  • Disadvantages
    • Various owners cannot take advantage of tax strategies that help them but not other owners.
    • If you have multiple businesses you may need multiple S Corps.
    • Less Flexibility

Option 2

Parent company is a partnership with each owner having their own S Corp that owns their percentage in the partnership.

  • Advantages
    • Each partner can utilize tax strategies as they see fit (hire kids, business automobile, etc).
    • If they own multiple businesses their personal S Corp can hold the ownership in those and all business income will flow through their S Corp prior to reaching them.
  • Disadvantages
    • Multiple companies, multiple tax returns, multiple payroll accounts
    • More to setup and maintain
    • More expensive

With that being said, lets run through some scenarios.

Scenario 1: Two owners and one wants a Mercedes for his business vehicle and the other wants a Prius. In option 1, there could be some conflict because the price for these are vastly different and the person with a Prius does not get as much out of the tax strategy. However in option 2, it doesn’t matter because they can hold the vehicle ownership in their personal S Corp and do whatever they want with affecting the other owner.

Scenario 2: Two owners in which they are 100% active in the business with no other ventures. In option 2 they would have to pay for a tax return for the partnership and then two S Corps. They would also have to run two separate payrolls for each S Corp. Rather if they chose option 1 it would be one business return and one payroll which means it is more cost effective.

Generally if the owners have multiple businesses they participate in, we will suggest option 2 since they will want all income to pass through an S Corp anyways so they can avoid a portion of self employment taxes.

If the owners are on the same page as far as spending and tax strategies, we typically say option 1 is fine for them to help minimize costs and maintenance.

Either way, there is no one size fits all for every situation so be sure to discuss with a tax professional to ensure you get things right from the beginning.

Check out our episode on the Small Business Tax Savings Podcast for more on this topic!

 

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