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.