Monthly Archives: May 2015

What is the Difference Between an LLC, S-Corp, C-Corp, and Sole Proprietor?

Business owners have several choices of how they can operate their business. The decision should be well thought out and be able to meet your objectives. Here are some of the pros and cons of each structure:

The easiest form of operating your business is as a sole proprietor. A sole proprietor has a lighter administrative burden because you account for your business activity on your individual tax return. Also, you may not need to file quarterly payroll tax returns, and may not need worker’s comp insurance. The downside to operating as a sole proprietor is unlimited legal liability, high self-employment taxes, and a greater potential to be audited by the IRS.

A limited liability company offers greater legal protection than a sole proprietor, and is also extremely flexible. You may have the option to be taxed as a sole proprietor, partnership, C-corporation, or S-corporation. Usually, single-member LLC’s are taxed as sole proprietors, which means that you have the potential to pay high self-employment taxes.

A C-corporation offers legal protection like an LLC. The drawback is that you have to abide by more legal formalities, and also pay corporate taxes.  Then, when you want to distribute the profits, you will pay taxes yet again as a dividend. C-corporations have their place, but are generally suitable for larger corporations.

A variation of the C-corporation is the S-corp. An S-corp operates just like a C-corporation, but avoids the corporate level tax by taxing profits on the owner’s individual tax return and potentially saves self-employment taxes. The downside to an S-corp is a higher administrative burden.

As you can see there are many pros and cons to each business structure and the decision should not be taken lightly. If you are thinking about choosing or changing your business structure, please call our office so we can advise you.

Are You Backing Up Your Data?

Most of us use computers for both our businesses and personal lives. What would happen if the information in our computers was lost or destroyed? Would you lose valuable information to run your business, such as the amounts due from your customers? What about the 1,200 pictures that you took with your phone or digital camera over the last five years? Here are a few simple options for backing up your data:

Offsite remote backup: There are many companies out there that will backup your data remotely and securely over the internet for a nominal cost. For instance, QuickBooks can backup your QuickBooks file for a small fee each month. Plenty of companies are out there that will backup your entire hard drive, but you need to make sure that the company is both reputable, financially strong, and that your data is secure.

External or Second Hard Drive: Starting at less than $100, you can purchase an additional hard drive that backs up your data on a regular basis. This is not very difficult, as the hard drive can be connected to a USB drive, along with installing the backup software, and now you are ready.

These are just some of the most basic ways to backup your data, but it is always advisable to speak to a computer consultant when dealing with complex issues.

An Overview of IRS Audits

There are different types of IRS audits. The first and least complex is the correspondence audit, next is the office audit, and lastly and most complex, the field examination. I highly recommend to anyone who receives a letter from the IRS, or even the State of NJ, to contact their tax advisor as soon as possible.

The correspondence audit is the most commonly used audit of all three types of audits. It starts with a letter issued from the IRS stating that a change has been made to your tax return, such as for investment income that you failed to report. Assuming in this case the IRS is correct, you will need to submit the additional tax assessed on the unreported income, along with interest to the IRS. If the IRS is not correct and you disagree then you will need to provide an explanation to prove that you do not owe additional taxes. Sometimes the notice is partly right, and the best course of action may be to file an amended return or complete the appropriate forms.

Since correspondence audits are very cost effective for the IRS, they also send letters for specific deductions, such as charitable contributions, to request substantiation for your deductions. This is why it is extremely important to keep all receipts for your deductions, because without any proof that you made donations, your deduction will be disallowed and additional taxes and interest will be assessed.

The next audit, the office examination, takes place at one of the field offices of the IRS by a local agent. Although more complex than a correspondence audit, the agent usually focuses on a select number of items. It is very important to be very prepared for this type of audit because it can lead to the agent broadening the scope of the audit.

Lastly, and most in-depth, is the field examination. This involves an IRS agent visiting your place of business or possibly your home. The agent requests much more information and asks a lot more questions. Again, it is very important to be well-prepared for this audit. It is also crucial to communicate with and work closely with your tax advisor.

After completion of an audit, there can be several outcomes. The first is an assessment of additional taxes, interest, and/or penalties, the second is no change to your tax liability, and third you may actually be due a refund (not likely, but that would be a great outcome)!