I have been in the services for CPA business for over 30 years, and every time I encounter somebody who knows what I do, I get asked the same question.
What kind of business do you think I need to open up?
It is an interesting question and the one that has many possibilities.
Do I need to open a corporation? Should I just file as self employed? What are the advantages and disadvantages and how much will all this cost?
The only answer I can give is: It all depends on your needs. Will you use a skilled accountant/attorney to open your business? If the answer is YES, it will cost extra.
Can you go online and do it all yourself? If YES, will you use professional tax software to prepare your tax returns?
I decide to break it apart and give you a chance to decide for yourself.
Lets take it one at a time.
Sole Proprietorship
Example: You do some contracting work and at the end of the year the company or companies will send you a form 1099. This form will incorporate all the payments made to you by that corporation.
In this situation you are self employed and responsible for all the taxes including Federal, State, Local & Self Employment tax.
Advantages:
- You do not need to shell out money for accountant or attorney fees to open any sort of entity i.e. corporation, LLC, etc.
- You have total control over your responsibilities, i.e. Tax installment payments, reporting earnings.
- You will use Form 1040, Schedule C to record your revenue and expenses. There is no need to document quarterly tax returns, unless you want to make quarterly estimated installments, you report your revenue once a year.
- Business terminates its existence when you decide to stop functioning or in situation of your death.
Disadvantages:
- individual liability. You are totally accountable & liable in situation of a lawsuit against you.
Limited Liability Company (LLC)
Example 1: You are a landscaper and you work for yourself. There is a likelihood and possibility of harm and you need to open a Limited Liability Company.
Example 2: You and a friend or a group of close friends made the decision to go into a business enterprise together and become partners in this enterprise.
In this case Partnership is your best answer.
Advantages:
- You or your partners are not generally held liable in the situation of a lawsuit.
- Members or individual partners make the choice on who will take care of the administrative duties.
- revenue usually disbursed based on the percentage of ownership, which is normally calculated based mostly on the cash contributed during the development of the partnership by each partner.
- There is no double taxation; each partner’s income is subject to self-employment tax.
- If there is only 1 member, the income and expenses are being reported on Form 1040, Schedule C. If there are partners, you will need to file Form 1065 and each member will receive a Schedule K-1 showing his or her income.
- There is a chance of transferring interest from one partner to another. Interest in the partnership could be sold to an outside party if the other partners concur.
Disadvantages:
- There is a cost connected with creation of the partnership. There could possibly be accountant/attorneys fees incurred.
- In case of a partnership, there are state & local taxes and fees associated if entity produced income.
C Corporation
Example: You made a decision to open a business with constrained Cash and you found a few people who are inclined to back you and invest money into your business. In this situation they are obtaining shares of your business. Those shares could be sold to an outside party without consideration of other shareholders. You will have employees, payroll, and sales tax.
Advantages:
- You need limited amount of cash that you need to contribute.
- Shareholders are notgenerally held liable in case of a lawsuit.
- earnings dispersed to shareholders as dividends and not taxed at corporate level.
- Form 1120 is utilized to report annually.
- Shares of stock are very easily transferred.
- Shares of stock could be sold to elevate capital.
- Life of the company can prolong past death or sale of your shares.
Disadvantages:
- There is a expense related with creation of the corporation. There may be accountant/attorneys fees incurred.
- Shareholders elect a board of directors/officers, who run the company.
- There are annual meetings and report filing specifications.
- Quarterly filing of payroll taxes, sales taxes.
- Double taxation is feasible.
- Taxed at corporate rate.
- There are state & local taxes and fees affiliated with 1120 C Corporation.
- Must have yearly meetings, board of directors meetings, corporate minutes must be taken during those meetings, and stockholders meetings.
S Corporation
Example: Example: You made the decision to open a business with restricted capital and you identified a few folks who are willing to back you and invest capital into your business. In this situation they are investing in shares of your business. Those shares could be sold to an outside party without consideration of other shareholders. You will have employees, payroll, and sales tax.
Advantages:
- You need limited amount of funds that you need to contribute.
- Shareholders are not normally held liable in case of a lawsuit.
- Each shareholder’s income is distributed at the end of the year and not subject to employment tax.
- Form 1120S is used to report annually.
- Shares of stock could be transferred, but you must observe IRS regulations on who can own stock and operating agreement.
- Shares of stock could be sold to raise capital.
- Life of the company can extend past death or sale of your shares.
Disadvantages:
- There is a expense connected with creation of the corporation. There could possibly be accountant/attorneys fees incurred.
- Shareholders elect a board of directors/officers, who run the company.
- There are yearly meetings and report filing requirements.
- Quarterly filing of payroll taxes, sales taxes.
- There is no tax on the entity level. All income is being passed through to the shareholders.
- C Corporations can not purchase stock in the S Corporation.
- There are state & local taxes and fees associated with 1120S Corporation.
- Must have annual meetings, board of directors meetings, corporate minutes must be taken during those meetings, and stockholders meetings.