Business Planning Flashcards
What is a sole proprietorship?
A business owned by one person with no legal separation.
What is an LLC?
A Limited Liability Company—offers liability protection and flexible taxation.
What is an S-Corp?
A pass-through entity that avoids double taxation and requires a reasonable salary.
What is a C-Corp?
A separate legal entity that pays corporate tax and may face double taxation.
What is pass-through taxation?
Business income flows to the owner’s personal tax return.
Why choose S-Corp taxation?
To reduce self-employment taxes by splitting income between salary and distributions.
What is a reasonable salary in an S-Corp?
A fair market wage for the owner’s role and industry.
Why is paying a reasonable salary important?
The IRS requires it—too little can trigger penalties.
What is a distribution in an S-Corp?
A share of profits not subject to payroll tax.
Can an LLC pay a W-2 salary?
Only if taxed as an S-Corp or C-Corp.
Can sole proprietors contribute to retirement?
Yes, using SEP IRAs or Solo 401(k)s based on net income.
What is a SEP IRA?
Employer-funded plan allowing up to 25% of compensation (max $70,000 in 2025).
What is a Solo 401(k)?
A retirement plan for solo business owners allowing employee + employer contributions.
Can an S-Corp owner use a Solo 401(k)?
Yes, from W-2 wages and employer profit sharing.
Which allows higher contributions: SEP or Solo 401(k)?
Usually Solo 401(k) due to employee + employer options.
What is a defined benefit plan?
A pension-like plan allowing large contributions for high earners.
What is the home office deduction?
Deduction for space used exclusively and regularly for business.
Can self-employed people deduct health insurance?
Yes, if not eligible for employer coverage.
Can owners deduct retirement contributions?
Yes—employer contributions are deductible.
What is the Augusta Rule?
Allows up to 14 days of home rental to business tax-free.
What is the 2025 mileage rate?
$0.67 per mile for business use (subject to IRS updates).
What is a buy-sell agreement?
A contract that defines what happens to an owner’s share at exit or death.
What is a business valuation?
An estimate of what the business is worth.
What’s a common solo business exit strategy?
Sell client list, merge, or create internal succession.
