So you’re starting a new venture and you’re thinking, “I know I’m supposed to form a Corporation or an LLC, but I don’t know what the hell I’m doing.” Not to worry! This is a process that nearly every business goes through in their early stages, and it’s relatively easy to narrow down the choices. I’ll take you through the pros and cons of each and explain when “S-corporations” come into play.
The majority of companies can be narrowed down to 3 choices for entity structure:
While there are other options for entity structure, these are the three most common for small businesses, which are my forte. Let’s break down each of these options.
One great thing about capitalism is that you can decide to start a company and begin operating immediately. No paperwork. No lawyers. No accountants. You can just start making money. This is a sole proprietorship, and here are the pros and cons:
Sole proprietorships make the most sense for side-hustles that create a small amount of income and don’t create significant liability issues. If your side-hustle becomes your main-hustle, it makes sense to start considering other options.
There’s something that feels nice about having “Inc.” after your company name. Unfortunately there are a few more things to consider. Here are the pros and cons of being a corporation:
Limited liability companies are becoming more common, especially for small businesses. Here are the pros and cons of LLCs:
S-corporations are formed by filing an s-election with the Internal Revenue Service. S-corporations are not legal entities, but rather just a change in tax structure for an existing legal entity, such as an LLC or a corporation. S-corporations make the most sense for companies with one shareholder that have net income of about $40,000 or more. There are significant tax savings to this election, but there are also additional professional fees required to operate and maintain an s-corporation. The tax savings start to outweigh the additional fees required once net income gets near the $40,000 range for most companies. If you are a sole-proprietor or single-member LLC owner and you are making more than $40,000 per year in net income, you are almost certainly paying too much in tax and it is time to consider the s-election. Here are the pros and cons of making this election:
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