Which business is right for you? Sole Proprietor, S Corp, LLC
What type of business (or business entity) is right for you? There are 4 types of business: Sole Proprietor, S Corp, C Corp, and Partnership.
A lot of people will tell me “I’m an LLC”. An LLC can also be one of the 4 business types I just mentioned.
LLC Misconceptions
Many people are under the impression that if you are a sole proprietor LLC, you have a lot of protection from liability and from getting sued. That is not necessarily true, because those laws are dependent on what state you live in. They do provide some protection, but not as much as an S Corp or C Corp.
Filling out your W9
When you become an LLC, or you start up as a business owner, a lot of your clients or vendors may ask for a W9. It’s very important that you know how to fill this out correctly. You’ll need to select which type of business entity you are. Underneath it says, Limited Liability Company, and if you’re also an LLC, you’ll need to check which kind you are. Questions? Call us at 814-636-0205.
What about liability protection?
When you’re an LLC and you really wanted that for the liability protection, you may want to consider going the next step up and becoming an S Corp.
Sole Proprietor Advantages
The advantages of being a sole proprietor are the ease of opening up your own business. You just need to get an EIN number (tax number) from the IRS, and you can do that easily online.
Another good advantage is that you can be your own boss by setting your own hours and deciding which clients you want to work with. Another advantage is ease of operation – it’s very easy to operate your business & get your taxes done.
Sole Proprietor Disadvantages
The disadvantages to being a sole proprietor are that an LLC may not provide liability protection that you expect – it depends on your state laws. Another disadvantage is that you have your self employment tax. That adds to marginal income tax by 15.3%. Also, you must pay quarterly estimated taxes, because of the pay-as-you-go tax system that we have. Those quarterlies are due due April 15, June 15, Sept 15, and Jan 15 of the following year. Check out my video where I explain more about quarterly taxes, and what happens if you don’t pay.
Another disadvantage is that it is difficult to raise capital. If you go to the bank for a loan, they want to see your tax return and how much money you made. When you’re first starting out, you don’t usually make a lot of money. Also, be careful if you choose to create a business doing something that you enjoy, for example making jewelry. If you don’t make a profit 3 out of 5 years, it will be considered a hobby rather than a business.
Also, there is no succession to a sole proprietor business. It’s difficult to pass on because a lot of times it is based on your passion for something. Your children may not have the same passion for the same things. A lot of times they go off and do their own thing.
S Corp Advantages
If you decide to go to the next level and create an S Corp, you definitely have the limitations on liability. The S Corp is considered a corporation, so that keeps your business separate from your personal. As an S Corp, your business can continue on if you decide to sell the business. Also, it’s much easier to raise capital through the bank.
When you’re an S Corp, you pay yourself a salary instead of having the self-employment tax. If you are doing the work, you’ll receive payroll wages, which will protect you through unemployment and Worker’s Comp.
S Corp Advantages
One disadvantage is that there is only one class of stock. Also, you have payroll obligations – You have to pay the federal government the FICA taxes and Social Security taxes for whoever you hired. A payroll company can help you with that – I recommend Van Cleve Inc, a local Erie company.
Another disadvantage is the complexity of business and the extra requirements of business meetings, tax requirements, and bookkeeping. Also, you have to track your basis in the entity.
Those are the advantages and disadvantages of a sole proprietorship and an S Corp. If you have any questions, please call me at 814-636-0205.