Small Business Advice Blog
Let us make your journey to success a little easier.
March 06, 2010
How should I form my new business?
When you start your business everything is new, exciting, and can be very confusing. One of those confusing issues is how you should form your entity (business). The most common forms are Sole Proprietor, LLC, S-Corp, or C-Corp. There are pro’s and con’s to each. I will go through them below.
Please note that I am NOT an attorney. Many new business owners cannot afford an attorney, I know I couldn’t, so if you cannot afford an attorney, just do as much research as you can and try to make the best decision based on your situation.
Sole Proprietorship
Advantages
- State file costs are NOT required
- The Administration overhead is normally low
- The Owner normally has full control of the business activities
Disadvantages
- Personal assets are at risk to lawsuits
- The company ceases to exist if the owner quits or dies
- Is subject to self-employment taxes
- Interest is NOT transferrable
- Business CANNOT offset taxes using medical reimbursements and other benefits
Other (These can be pro’s or con’s depending on the circumstances)
- Business is not taxed itself, rather the individual is taxed on their personal taxes through a Schedule C
- Typical Tax Form – 1040
LLC
Advantages
- Personal assets are protected from lawsuits to the company
- Administration overhead costs are low
- The owner can choose any structure for the business that he wants in terms of control
- In MOST states, the company remains in existence if the owner quits or dies
- The IRS does not have a standard way to file taxes for LLCs so the owner can choose to file as a Sole Proprietor using a 1040, a S-Corp using a 1120S or a C-Corp using a 1120
- Depending on the restrictions set in place when the LLC was created in the operating agreement, the interest may be transferrable
Disadvantages
- Must file with state and pay filing fees (These are normally not too bad)
S-Corp
Advantages
- Personal assets are protected from lawsuits to the company
- If the owner quits or dies, the company remains in tact
- Interest is transferrable; however, note that there are IRS restrictions on who can own stock in an S-Corp
Disadvantages
- Must file with state and pay filing fees (These are normally not too bad)
- For employee shareholders who own more than 2% of the company, they cannot offset taxes using medical reimbursements and other benefits
Other (These can be pro’s or con’s depending on the circumstances)
- Administration overhead includes elections of board of directors, corporate minutes, annual meetings, and report filings. Understand that these can be simple and time can be kept to a minimum. There are also templates to help set these up.
- Shareholders elect directors to control business decisions. Note: If the shareholders consist of only 1 person, the control remains with that person
- Business is not taxed. The Income is passed through to the shareholders. Business uses 1120s form
- Salaries are subject to self-employment tax however, shareholder distributions are not
C-Corp
Advantages
- Personal assets are protected from lawsuits to the company
- If the owner quits or dies, the company remains in tact
- Shares of stock are easily transferrable
- Company can offset taxes using medical reimbursements and other benefits
Disadvantages
- Must file with state and pay filing fees (These are normally not too bad)
Other (These can be pro’s or con’s depending on the circumstances)
- Administration overhead includes elections of board of directors, corporate minutes, annual meetings, and report filings. Understand that these can be simple and time can be kept to a minimum. There are also templates to help set these up.
- Shareholders elect directors to control business decisions. Note: If the shareholders consist of only 1 person, the control remains with that person
- Company is taxed at corporate rate. Employee shareholders are taxed on dividends and salary as if employed any where else. Company uses 1120 form to file taxes.
REMEMBER that the formation of a company is NOT an easy decision and should not be taken lightly. The best course of action is to consult an attorney as well as an experienced accountant on advice to help you in making your decision.
Carter Services Plus is a full-service accounting firm that offers accounting services, bookkeeping services, payroll services, training, marketing advise, tax preparation services, and consulting among various other financial services. We specialize in small businesses and offer advise and services to start-up companies as well. Please feel free to call us to set up a FREE consultation to review your current financial situation or to find out if we are the right fit for you.
