Being incorporated means that you've established a business which is now separate from you. You can choose to incorporate as an LLC, S-Corp or C-Corp. For most small and startup business, LLC or S-Corp should be sufficient.
LLC - Limited Liability Company
As the name implies, an LLC can protect your personal assets in the event you are sued. LLCs are "pass through" organizations. This means that the profits (or losses) are passed through to you as an individual on your personal tax return. If the LLC is a single-member LLC (only one owner) then a separate business tax return is not needed at the federal level, some states may still require a filing.
This is an advantage because you do not need to pay for an additional tax return to be filed. As a single member LLC your income and expenses will be detailed on schedule C just the same as a sole proprietorship. You, of course, will be subject to self-employment tax.
Additionally, LLCs have a less formal structure and do not limit the number of owners or restrict owner eligibility based upon residency status.
This is an advantage because you do not need to pay for an additional tax return to be filed. As a single member LLC your income and expenses will be detailed on schedule C just the same as a sole proprietorship. You, of course, will be subject to self-employment tax.
Additionally, LLCs have a less formal structure and do not limit the number of owners or restrict owner eligibility based upon residency status.
S-Corp - Subchapter S Corporation
Like an LLC, an S-Corp can also protect your personal assets and is also a pass through organizations. The major differences are a) you must file a business tax return and b) there are limits on number of owners and who can be an owner.
Form 1120-S must be filed for any business that is incorporated as an S-Corp. Meaning you will need to pay for and file 2 tax returns and your business return will need to be completed before your personal return.
S-Corps are limited to 100 shareholders (owners) and depending on residency status, not everyone is eligible.
S-Corps have one other noteworthy advantage over LLCs. They can reduce self-employment tax. As an S-Corp you may pay yourself a salary out of the company and when the profits are passed through to your personal return there will be no self-employment tax.
For most small businesses, starting out as a sole proprietor is sufficient. As the company grows larger and/or becomes susceptible to lawsuits that is when you may want to consider incorporating. Always check with your local and state government to get all the facts on how to apply and register as your desired entity. Every state has different requirements and different fees.
I can't choose for you but I hope these few distinctions will help you make the right choice for your business.
Always consult your own tax professional before making any major moves and if necessary, consult an attorney.
Your Mobile Tax Pro,
Liz
Form 1120-S must be filed for any business that is incorporated as an S-Corp. Meaning you will need to pay for and file 2 tax returns and your business return will need to be completed before your personal return.
S-Corps are limited to 100 shareholders (owners) and depending on residency status, not everyone is eligible.
S-Corps have one other noteworthy advantage over LLCs. They can reduce self-employment tax. As an S-Corp you may pay yourself a salary out of the company and when the profits are passed through to your personal return there will be no self-employment tax.
For most small businesses, starting out as a sole proprietor is sufficient. As the company grows larger and/or becomes susceptible to lawsuits that is when you may want to consider incorporating. Always check with your local and state government to get all the facts on how to apply and register as your desired entity. Every state has different requirements and different fees.
I can't choose for you but I hope these few distinctions will help you make the right choice for your business.
Always consult your own tax professional before making any major moves and if necessary, consult an attorney.
Your Mobile Tax Pro,
Liz
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