Sole trader or S-Corp?

laurenornot

So, I'm beyond ready to declare this little hobby o' mine a real business and start earning some taxes back.

In my research I've narrowed it down to marking myself a sole trader (DBA) or S-Corp, to start.

Anyone have any suggestions or recommendations on either of these two business models?

Thanks in advance!

stephcarson

My accountant said LLC, tax purposes you'd be sole proprietor, but of course this is for my neck of the woods. I'd look at the fees associated with your choices.

SamirD

To go with a S-Corp, you'll be shielded from liabilities since you're a corporation, be taxed like a partnership or LLC electing to be treated as a partnership so the revenues pass through to you for taxation. But the downside is that you will need to maintain proper corporation papers and file a 1065 return that incorporates your K-1s for your personal return. And this is something you'll need an accountant for. I can fill out my own 1040 no problem, but the 1065 is a whole different animal.

An LLC and S-Corp are extremely similar. You'll have to do some searches to see what the subtle differences are as well as the benefits.

Dan7312

Besides probably needing an accountant for S-Corp tax filing your state will probably require you to pay a filing fee every year, here in MA it's about $600. It's also not clear how much it will shield you. Unless your business is doing very well you will probably be required to personally guarentee any loans to your corp and in some cases may even have to ppersonally gurarentee performance on a contract commitment. Also I've come to find that an S-Corp is not as sturdy a libility firewall as you might think.

My company is just two people and is an S-Corp we (my wife and I) stated some time ago, but now with 20-20 hindsight I think a sole propriatership or LLC might be a better way to go. I think the S-Corp makes more sense if bunch of people are involved in the corp.

But in any case you really need to get advice for a laywer or tax account to understand how your choice of setting up your company will affect you. Unforunately both will make more money if you go S-Corp so keep that in mind when you listen to what they tell you.

SamirD wrote: »

To go with a S-Corp, you'll be shielded from liabilities since you're a corporation, be taxed like a partnership or LLC electing to be treated as a partnership so the revenues pass through to you for taxation. But the downside is that you will need to maintain proper corporation papers and file a 1065 return that incorporates your K-1s for your personal return. And this is something you'll need an accountant for. I can fill out my own 1040 no problem, but the 1065 is a whole different animal.

An LLC and S-Corp are extremely similar. You'll have to do some searches to see what the subtle differences are as well as the benefits.

FedererPhoto

My accountant put it simply (given I don't understand this stuff very well):

If you are a single person, an S-corp has added complications (and therefore cost) such that the benefits aren't worth it until you reach around 20k per-year profit. (not net) Until you hit that point, a sole-prop LLC is cheaper and easier and the amount you 'lose' through the different taxation is less than it would cost to set up and maintain the S-corp.

SamirD

FedererPhoto wrote: »

My accountant put it simply (given I don't understand this stuff very well):

If you are a single person, an S-corp has added complications (and therefore cost) such that the benefits aren't worth it until you reach around 20k per-year profit. (not net) Until you hit that point, a sole-prop LLC is cheaper and easier and the amount you 'lose' through the different taxation is less than it would cost to set up and maintain the S-corp.

Hmmm...interesting that he mentions different taxation between LLC and S-corps because an LLC can elect to have partnership passthroughs just like S-corps, negating any real advantage for S-corps on a tax basis. In fact, I don't think there's any real advantage to an S-corp vs LLC except in very limited circumstances. I've seen businesses with 1mil+ gross sales run via an LLC.