34 DECEMBER 2025 WorldWide Drilling Resource® See us at Booth 3045 Groundwater Week 2025 in New Orleans Drilling Into Money Not Boring by Mark E. Battersby The Right Entity for Every Business Is the entity used to operate the drilling operation or business costing you money? Choosing among the various entities can result in significant differences in federal income tax treatment. As a business owner, every drilling contractor or supplier has several options for structuring their business. While the Limited Liability Company (LLC) is the most popular today for tax purposes, other entities, such as the regular, so-called ‘C’ corporation, its pass-through small business cousin, the ‘S’ corporation, or an increasingly rare sole proprietorship, all have much to offer. And, don’t forget pass-through businesses including sole proprietorships, partnerships, LLCs, and S corporations don’t pay a corporate income tax. Not only is the drilling operation’s income (or losses) passed on to the owner’s personal income tax return, there is also the Qualified Business Income (QBI) deduction to be considered. The QBI deduction allows eligible pass-through and self-employed small business owners to deduct up to 20% of their qualified business income. Because the business structure will affect the ultimate tax bill, now might be the time to switch to an entity which is a better fit, but how? Changing business structures used to be rare thanks to the limited options. Today, an LLC can choose to be taxed like a regular corporation by simply filing a form with the Internal Revenue Service. In fact, to change a business's entity classification, either Form 8832 or Form 2553, depending on the specific change, is needed. • Form 8832, Entity Classification Election, is used to change to a regular corporation, partnership, or so-called “disregarded” entity (if a single owner) by LLCs and partnerships. • Form 2553, Election by a Small Business Corporation, is used by incorporated drilling operations and LLCs to elect to be taxed as an S corporation. Naturally, to qualify, the business must meet specific requirements such as being a domestic entity and having no more than 100 shareholders. Depending on the type of switch and the drilling operation’s situation, a substantial tax bill might result. For example, the dissolution liquidation process may create a tax liability for everyone receiving an interest in the business. Fortunately, a direct conversion typically does not incur additional tax liability. Whether the business is operated as a sole proprietorship, LLC, or as another entity, it may be time to chose a new entity. To help with this decision-making process, professional advice is strongly recommended. Mark Mark E. Battersby may be contacted via e-mail to michele@worldwidedrillingresource.com
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