Tag Archives: llc

#AskAronson: “Should We Use Cash Basis or Accrual Accounting for Tax Purposes?”

AskAronsonThe most popular method of accounting is cash basis, primarily because of its simplicity.  Reporting on the cash basis allows the business to report income as cash received and expenses as they are paid.  Under the accrual method, income is reported in the year it is earned and expenses are either deducted or capitalized in the year they are incurred.

Cash basis tax reporting is best for companies who are in their growth phase where their accounts receivable grows each year and is in excess of their accounts payable and other accrued liabilities.  This allows for a deferral of taxable income related to those receivables until actually collected.  However, there are limitations on what entity types are eligible to report on the cash basis.  With a few exceptions, C-corporations are generally not eligible to report on the cash basis method for tax purposes.  However, many partnerships, limited liability corporations, and S-corporations are eligible to use the cash basis method for tax reporting.

For more information, please contact your Aronson tax advisor or Melissa Tarkett at 301.231.6200.

Starting a Law Practice – Part 3: Choice of Entity

law-firm-series-lg-1A previous post in our blog series for entrepreneurial attorneys focused on the importance of a solid business plan, and a critical part of that process is determining the entity structure for your new company. A law practice can operate in a variety of forms: sole practitioner, partnership, professional corporation, or limited liability company. A new practice’s choice of entity is an important decision that will have significant consequences for many years.

  • Sole practitioner or partnership – Before the development of the limited liability company (LLC), many attorneys operated as sole practitioners or in general partnerships. Currently, these forms of practice are the least desirable and cannot be recommended, primarily due to the unlimited personal liability exposure to the owners.
  • Professional corporations address the problem of unlimited personal liability for the practitioner, but carry with them the potential for two levels of income tax (one at the corporate level and one at the individual stockholder level). While the potential for double taxation is eliminated by electing to be treated as a subchapter “S” corporation, the result is an inflexible operating form due to inherent limitations of the “S” corporation, the most notable of which are that: the corporation can have no more than 100 shareholders, can have only one class of stock, and any distributions must be done strictly based on percentage ownership.
  • The limited liability company (LLC), limited liability partnership (LLP), professional limited liability company (PLLC), and professional limited liability partnership (PLLP) are by far the most popular entity choices for a law practice. These entities offer the limited personal liability of a corporation with the flexibility and single-level tax found in a partnership or sole proprietorship. Easy to establish and operate, the LLC, LLP, PLLC, and PLLP are the smart choices for today’s lawyer.

Aronson LLC can help you consider which entity is right for your practice. Contact Larry Rubin, CPA at 301.231.6200 or LRubin@aronsonllc.com.

 

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