Want to Start a Small Business? Here are Three Options.
Are you thinking of starting your own business but not sure what your options are? Below are three small business options and some comparisons between them.
Sole Proprietorship
The simplest business to manage is a sole proprietorship:
One owner max is allowed.
You are personally responsible for business liabilities.
Taxes are on the entire profit (self-employment AND federal/state income taxes).
There is no separate return to file; simply include Schedule C with the annual 1040.
It is the most straightforward for bookkeeping/tracking expenses.
It is the easiest to set up.
LLC
If you have potential liability concerns, I personally recommend establishing your business as an LLC:
It can be a sole proprietorship or S Corp (It can be used for partnerships).
An unlimited number of owners/members is allowed.
The business, not the owner(s), is responsible for liabilities.
Taxes flow to the owner(s) either through a personal return 1040 or a partnership return 1065.
It requires annual filings and fees to be tax compliant.
It cannot go public
S Corp
When your business income reaches a certain level, it would likely be wise to elect to be taxed as an S Corp to minimize self-employment taxes (Social Security and Medicare). The deductions for salary to the owner and the employer portion of self-employment taxes reduce profits and, therefore, the federal income tax on those profits:
It is suitable for small organizations (can be single member LLC).
Only 100 shareholders are allowed.
The business, not the owner(s), is responsible for liabilities.
Taxes flow to personal owner(s) returns from business return 1120-S.
It requires filings and fees to be tax compliant.
It is a good option to minimize employment taxes and reduce net profits.
There are strict rules regarding management/admin/recordkeeping.
Have more questions? Contact me for assistance in getting started.