Choosing a business entity

There are several ways you can operate your business. Let’s break down your options.

Sole Proprietor

This means you operate your business as yourself. There is no distinction between you and your business. If you run your business under your personal name then that’s it. If you operate under another name such as “Irene’s Ice Cream”. Then you will need a business license from your local county.

Operating as a sole proprietor is simple but it doesn’t give you any protection legally. Remember, you are your business. So, if an incident should ever arise and your business is sued, that means you are being sued. All of your personal assets are at risk.

For tax purposes, the business activity for a sole proprietor is reported on their individual tax return (Form 1040). An additional form is added to the tax return called Schedule C. All business activity is reported on Schedule C. All profits on schedule C are taxed at the 15.3% self-employment tax rate plus your applicable income tax rate.

Most new entrepreneurs have a tax loss in the first year. If you haven’t done so please see my post titled 4 Ways to Save Money on Business Taxes.

LLC

LLC stands for limited liability company and is a legal entity. The benefit of filing as an LLC is legal protection. You are now separate from your business.

LLCs also offer the most flexibility because the entity can choose or elect how they want to be taxed. There is no tax return for “LLC”. Each owner of an LLC will default to a tax treatment or choose how she wants to be taxed.

FOR TAX PURPOSES:

LLCs with one owner default to Schedule C of your individual tax return. (Always subject to self-employment tax)

LLCs with more than one owner default to a partnership business tax return. (Always subject to self-employment tax)

Any LLC can elect to be taxed as an S-Corporation or as a C-Corporation.

S-Corporations have to option to reduce or eliminate the self-employment tax

C-Corporations are subject to double taxation

Corporation

This type of entity is more involved and has several requirements. It has become less popular over the years since an LLC can choose to be taxed as a corporation. It’s often not necessary to form your business as a corporation, to begin with. The main reason why someone would choose to form a corporation over an LLC is if they plan to involve outside investors.

So, there you have it. Which entity will you choose? Do you have any questions? Let me know.