When starting a solo business, your legal structure impacts your taxes, the business’s liability, and the paperwork you must create and maintain. Here are the three most common options:
1) Sole Proprietorship
This is the simplest structure – you and your business are legally the same entity. There is not any formation paperwork required. And, you report business income to the government on your personal tax return. However, you are personally liable for any and all business debts you accrue and lawsuits that might happen. This option is likely best for a very low-risk businesses that is just starting out.
2) LLC (Limited Liability Company)
This legal structure creates a separate business entity and it can protect your personal assets from your business liabilities while you also could maintain tax flexibility. Under this legal structure, you can choose to be taxed as a sole proprietor or taxed as a corporation. This structure typically requires a state filing (usually from $50-$500) and ongoing compliance (extra $$). This legal structure is ideal for most small businesses that want liability protection without any of the corporate complexity.
3) S-Corporation
This is a tax designation, not a business structure. But, it is an option and it is often chosen. Here, you form an LLC or corporation, then you elect S-Corp tax filing status. this will Allow you to split the income between a salary and business distributions. This tax filing status could potentially save you on self-employment taxes. You should consider that this makes the most sense once you pass netting about $60,000+ annually. This is because any tax savings that you accrue must be offset by the additional costs of meeting more accounting and payroll requirements.
Summary: Quick Decision Framework:
Are you just testing an idea? Start as a sole proprietor
Do you have liability concerns or do you plan to grow your business? Form an LLC
Are you already making a substantial profit? Consider S-Corp election
DISCLAIMER/NOTE: This is just a quick run down of general information to get you started or up to speed with what you might begin discussing. It is not advice. And, it is not related to your specific circumstances. Always consult with a business attorney or an accountant for your specific situation. You should consult with a business professional because state laws and individual circumstances can vary, very significantly.
