Is an LLC or S corp right for me?
You may be ready to graduate from sole proprietorship land.
You don’t need to necessarily “set up the business” before you dive in and start selling! That’s because you are a sole proprietor by default. In other words, you have a business that is automatically considered to be a sole proprietorship. That’s what most businesses are in the United States, and that may be all you need. If you do form a different type of entity, the next step is usually going to be an LLC (limited liability company), potentially followed by an S corporation.
I help clients set up these entities frequently in order to provide them with more protection and realize maximum savings.
What You Can Expect
Setting up an LLC or S corp isn’t all that complicated. The trouble is that it isn’t always very intuitive, and simple mistakes can cost you additional time and fees to correct. I frequently help small business owners to form LLCs in their states and to make S corp elections for their LLCs.
Includes Articles of Organization & EIN
Does not include state fee (varies by state, see list here)
S Corporation Election
Late S corp election: $500
Is an LLC right for me?
Liability Protection. The main benefit of an LLC is liability protection. It helps to legally separate your personal assets from your business. So if you don’t have personal assets you’re worried about, or if liability isn’t a concern, there may be no rush to form an LLC.
Enhance Your Image
You may want to form an LLC just to be more official overall. It can increase the perceived legitimacy of your business.
Increase Your network
Another reason some businesses become LLCs is because it increases your network of providers who will do business with you. Sometimes certain vendors, wholesalers, or banks may require you to be an LLC before they work with you.
Stepping stones To Savings
An LLC isn’t much different from a sole proprietorship taxwise. But what is different is an S corporation. And you can’t form an S corp unless you have an LLC in place first (or a C corps, but we don’t like those around here).
Is an S corp right for me?
An S corp isn’t technically an entity. It’s a tax election. When you elect S corp status with the IRS you are an LLC that is electing to be taxed according to Subchapter S of the Internal Revenue Code. S corp earnings are not subject to self-employment tax. That means you basically save 15% on your profit.
There is no magic number, you just want to make sure that the S corp savings more than offset the additional costs you incur from operating as an S corp. Those include the cost of tax preparation (it’s a whole separate tax return), payroll (you also have to pay yourself a W-2 salary), state fees, etc. If you have an annual profit of around $40K, it’s at least worth looking into.
S corp elections are due on March 15 of the current year to be effective as of January 1st of the current year. Businesses also may qualify for what’s called Late Election relief, which in some cases allows you to claim S corp status retroactively up to 3 years.