If you are in business for yourself, do it as a small business LLC.
Disclaimer: I’m not an attorney, so don’t make the mistake of taking the following as legal advice. It’s really a smart idea for you to seek competent legal and tax advice for your particular situation before starting your company.
There are four basic options you have when you form your start-up:
- Sole proprietor
For most people, the LLC is the way to go – assuming you won’t be inviting other people to invest in your small business start-up. If you do, you have to factor in the liability of partners and perhaps consider some other form of entity.
Of course, all four choices have pros and cons. But as you’ll see in a moment, the LLC is very attractive for the right business owner.
Sole proprietor has a huge advantage – it takes no time or money to set up. So if you’re really lazy and don’t care about protecting yourself or your business, go that way.
However, if you do care about protecting yourself and your business, keep reading.
An LLC is super easy to set up and costs very little, especially if you use a company like LegalZoom. The big win here is that even though it’s not a corporate entity, it’s a separate entity from yourself and helps protect your assets.
LLCs are really cheap to maintain too. You don’t have to deal with the complicated bookkeeping, tax filings and other regulations that the C-corp demands. Need more convincing? Members of the LLC are taxed – not the entity. This is huge if you’re a start-up. Why?
Well…start-ups often lose money. If you do and your business is formed as an LLC, you can pass that loss straight through to your personal return. If you form your start-up as a C-corp, it will pay tax on its income and then you will pay tax on any distributions the C-corp pays out to you. Rather stinky.
In other words, if you are a C-corp the company is a tax-paying entity – it pays tax on all income. Then, if the company pays you, you pay personal income tax, that is, money coming into the company is taxed twice by the time you get it. The C-corp form also requires you to have a board of directors and maintain books and records. It’s a paper nightmare.
Another option would be the S-corp. This is just a special kind of C-corp. You get the protection of the C-corp and the tax pass-through benefit of the LLC. (Also keep in mind that the S-corp requires different tax forms than the LLC. And at least for now, distributions of profit aren’t subject to the self-employment tax…for now.)
You do have to deal with the regulatory requirements and you have to be careful as to who you admit as shareholders.
For most business start-ups, the LLC is the way to go. And if you qualify, a Professional LLC is even better. They are a snap to set up, help you avoid double taxation and are cheap to maintain.