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Here are some things to consider when organizing your
business.
Legal protection is an important consideration when deciding what form
your business
entity should take.
You should
learn all you can about these choices. You should also know
when to turn to experts who can help you understand
ambiguous or not-faced-before issues.
You should talk with an attorney and a tax pro for help with
specific legal and financial questions.
Below is a thumbnail sketch of some of the
characteristics of various business entities —
sole
proprietorships,
partnerships,
S Corporations,
C
Corporations and
Limited Liability Companies.
Check
your state's
Department
of Revenue and Secretary
of State for specific filing requirements and tax
obligations.
-
Sole Proprietor
Pro
Easy to set up, easy to run, the easiest for
first-time entrepreneurs to understand, and the easiest
to get out of.
Con
Unlimited personal liability, 15.3%
self-employment tax on all earnings up to $80,400.
-
-
Partnership
Pro
A good way to participating in a venture
with other individuals without having to deal with
payroll issues; partners can also get
"unequal" distributions of income if all
parties agree.
Con
Liability for the financial actions of all your
partners in the partnership; ordinary income from the
partnership is subject to self-employment tax; tracking
of partners' capital accounts balances can be
complicated.
-
-
S Corporation
Pro
No Social Security or Medicare taxes on
profits or dividends from the corporation to
shareholders.
Con
Can't fully deduct your own health insurance or
benefits plan costs (only those of employees); you also
lose most of the benefits of the home office deduction
even if that's the only place where you operate your
business.
-
-
C Corporation
Pro
100%
deductible health insurance for employees, including
shareholders; potentially fully deductible medical
reimbursement and fringe benefits plans for all
employees, including shareholders; profits of up to
$50,000 annually are taxed at 15% if retained in the
corporation rather than at your, potentially higher,
personal income tax rate.
Con
If the corporation loses money, you don't get
to deduct it on your personal tax returns; if profits
that have been already taxed at the corporate level are
later distributed to you as dividends, you'll have to
again pay tax on that money.
-
-
-
Limited Liability Company (LLC)
C
Basics
Pro
Owners get the limited liability features
of a corporation combined with the income-splitting
flexibility of a partnership; one-person LLCs can report
income on a Form Schedule C with personal tax returns.
Con
Owners get stuck with the same self-employment
tax treatment as partners and sole proprietors; states
may differ in their tax treatment of LLCs; lawyers worry
that there is little case law for what happens when an
LLC formed in one state gets sued for something that
happens in another state.
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