I often receive questions about how to set-up a business. Potential new business owners are excited to set-up their businesses, but they don’t always know the best way to set-up their business. There is tons of information on setting up a new business and you should do your due diligence and research on each type of entity thoroughly.
This week I am going to share 3 entities with you and a few advantages and disadvantages of each. More detailed information can be found in our Start-up Success Guide.
As a sole proprietor you are operating your business as yourself and not as a legal entity. You file your business taxes through your Schedule C on your personal income tax return each year. This type of entity is fairly easy to set up. There are no legal paperwork requirements. However, please be mindful that there is no protection for you against lawsuits.
Limited Liability Corporation (LLC)
A Limited Liability Corporation consists of one or more members and acts very similar to a partnership. It is a disregarded entity by IRS standards. This means that even though you are a legal entity by state guidelines, in the eyes of the IRS you are still not an entity.
Many business owners choose this form of set-up because it is simple to set-up in most states. You simply fill out a form and pay a filing fee and you’re done. One of the biggest advantages of establishing your business as a LLC is that in the event of any legal actions, your liability is limited to the value you have in the company at that point in time. Your personal assets are protected.
An LLC is a pass through entity, which means any income generated from the LLC will still pass through to your personal tax return. However, it will pass through at the net and not the gross. Your tax accountant can help you with this.
Small Corporations, or S-Corp for short, is a corporation with some LLC benefits. S-Corp have 100 or fewer shareholders and is also considered a pass through entity. Therefore, you do not have to pay corporate tax. That’s the biggest advantage of being classified as an S-Corp. Another big advantage is that you are able to deduct some expenses that are typically non-deductible for LLCs. Expenses such as shareholder salaries and health insurance, which are both big ticket items.
Now when trying to decide which type of entity you should establish your business as, I suggest that you consult with both your lawyer and your tax accountant. You should meet with them both together, if possible, to ensure that your legal and tax ducks are in alignment and all in a row. Be sure to explore all of the advantages and disadvantages of all 5 types of entities and to determine which one is the best type for you and your business model. If you are also considering a C-Corporation or a Partnership, be sure to download our Start-up Success Guide for more information.
How did you choose your business entity? What advantages or disadvantages helped you make your final decision?
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