Although tax season is over, tax questions arise year round. My husband is an experienced accountant and will be answering questions sent to me at firstname.lastname@example.org
I have received A LOT of questions lately about setting up a business. I wrote a post HERE about deciding on what entity to be. My husband (the accountant) has created a graph below that may make things more understandable.
There are several choices for set up…however, depending on the structure of the business, the liability protection, and the money you are going to be taking out of the business as compensation will determine the best way to organize. I have omitted the Partnership Entity simply because this MUST be made up of 2 or more individuals and is a hybrid form of LLC & S-Corp (pays Self Employment tax, can have W-2 wages, limited distributions, files a Form 1065 that flows through to personal return. See chart below:
|Structure||Cost to set-up/maintain||Liability Protection||Ease of Getting out $$$|
|Sole Proprietor (Sch C)||Low, files Sch C on your 1040. Pays self-employment tax||None||No W-2 for owner/can take unlimited distributions|
|LLC||Medium files Sch C on your 1040. Pays Self-Employment tax||Limited Personal protection||No W-2 for Owner/can take unlimited distributions|
|Incorporated (C-Corp)||High, files its own 1120 tax return, pays its own tax at higher corporate tax rates||Excellent personal protection||Compensation on W-2, can take dividends (these are taxed)|
|Incorporated (S-Corp)||High, files its own tax return, pays no tax at corporate level, profit “flows through” to personal tax return||Excellent personal protection||Compensation on W-2, can take non-taxable distributions, but is limited to “basis” in the business.|
This chart is not all-inclusive, but is a good start for you to make a determination as to what you think you may want to do.
*Please keep in mind this post is for informational purposes only and answers given are very general. Many things depend on individual circumstances. Please contact your personal accountant or financial advisor for your particular situation.
photo credit: austinpost.org
Filed under: Ask an Accountant