Do you want to begin investing on a large scale? Whether your plans include alternative investments, investing in one or more private businesses, buying real estate, or investing in something unique, one of the best ways to help protect your finances and keep taxes low is to use a separate business entity. Why? Here's what every serious investor should know about business entities.

What Is a Business Entity?

A business entity is an organization that is recognized by the legal system as its own entity separate from the individuals who are involved in it. The entity has rights and responsibilities, including filing taxes and suing others, just as a person would. Owners, on the other hand, see reduced personal liability and changes in their personal taxation.

A modern investor may choose from a wide variety of legal entities. This includes business entities like limited liability companies (LLCs), S corporations, C corporations, and partnerships. Nonbusiness entities - most commonly a trust - can also be used to hold many types of investments.

What Are the Financial Advantages of a Business Entity?

So, why should you consider using a business entity to hold your investments? Aside from legal protections, the financial reasons are many and varied.

First, it can help reduce your taxes. Corporations and LLCs that operate as a corporation pay income tax on their own profits. Owners only pay taxes on what they actually withdraw and keep. This is the opposite of an investor who operates as an individual and must pay personal income taxes on all profit no matter whether they used it or reinvested it. And in estate planning, a trust can help avoid inheritance and estate taxes.

Many entities can also help with tax deductions and credits. Consider a professional who wants to invest in the purchase of a building rather than lease property from someone else. The formation of a separate entity for this investment building provides a more efficient way to deduct operational expenses while the business continues to pay rent and deduct it from its own taxes. The result can boost your tax planning.

As your investments grow, too, you may want to work with other investors. A landlord, for example, might begin with just one investment property but eventually grow their investments to a point where they want to take on a partner or investor. If everything is owned by the individual, getting capital through investors will be difficult or even impossible. Having a business entity means you can easily take on new capital.

Finally, anyone engaging in any sort of profit-making endeavor should keep their personal and business finances as separate as possible. Failure to do this could result in higher tax bills than necessary, fraudulently-used deductions, and increased personal liability for business debts. The best way to keep your personal and investment books separate is to create a distinct entity through which to funnel business activity.

Where Should You Start?

Could your investment benefit from the potential tax savings, simplified growth, and accurate bookkeeping provided by making it into its own business entity? If so, start by learning more about the various entities, their pros and cons, and how to set up one for yourself. While it may seem complex from the outside, many entities are relatively easy to start and require only quarterly or annual reporting.

Washington investors can call on the business accounting professionals at Bliss & Skeen CPAs. We will work with you throughout the stages of your entity's life - from its selection and formation through its bookkeeping and operations. We can even help with changing the entity or terminating it when the time comes. Call today to make an appointment.