13 Sep A Few Thoughts on Best Form of Business
Choosing the legal / tax structure for a new business is a very important decision and one in which many start-ups spend little time and money investigating.
All the ins and outs of your choices cannot be discussed in this limited space, however, we can give you some information which may help get you started.
Sole Proprietorship–this is basically what you are if you don’t do anything else. You can use your name and social security number and just start working and billing. If you do choose this we recommend:
- Completing an SS-4 form online and obtaining an employer identification number, so you don’t need to spread your social security number around.
- Obtaining business errors and omissions and workmen’s compensation insurance.
- Registering with the County if you are doing business under another name than your own.
Limited Liability Company–if you are the only owner, the taxes are the same as a sole proprietorship, filing a Schedule C on your personal tax return. If you have one or more partners, you must file a partnership or corporate tax return (usually we see partnership returns.)
Advantages of the limited liability company:
- If used properly can shield you from personal liability, like a corporation.
- Can be simple to withdraw compensation if you have no employees beyond the partners, you can just distribute the profits as draws to the partners.
- Compensation among partners does not have to be proportional to ownership.
- No double taxation. The earnings of the LLC flow directly to the partners and is not taxed at the entity level.
S Corporation–designed for small businesses as there cannot be more than 100 shareholders. It also may provide protection of personal assets due to the corporate form. There are more administrative costs to this form vs. the previous two because owners are generally employees also and must be provided a W-2 and payroll taxes computed and filed quarterly for FICA, state withholding and unemployment. In addition all shareholders must be treated exactly the same or the S election could be revoked.
S Corporation advantages are:
- Ease of transfer of ownership as stock.
- No double taxation.
- Possibility of withdrawal of dividends without self-employment or FICA taxes being assessed.
Regular C Corporation–this is generally what all large corporations are. They can have unlimited shareholders. However, they do pay tax at the organization level, so earning could be subject to double taxation–once at the corporate level and once when paid out to the shareholder or employee.
C corporation advantages:
- Unlimited shareholders.
- Ease of transfer of ownership.
- Possible medical reimbursement plan benefits.
The above just touch on a few of the highlights. Please contact us if you would like to discuss any of these further. We do recommend you determine form of business early on in the business start-up process.