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First, let's address the corporation vs sole proprietorship issue since it is a major decision and impacts all else. I personally advise all my clients starting a new venture to either form a corporation (coupled with an S Corporation election) or an LLC. The reasoning is that either structure legally separates your venture and its activities from your personal life. Then, if there is a lawsuit or other problem, the business stands on its own and your other personal assets and income cannot be touched. After the remainder of my remarks I will provide some information concerning each of these (in separate posts) to help you understand this a bit more.
1.The after cash tax flows in either of these choices would be about the same with one exception. As a sole proprietor you would be subject to the Self Employment tax (a corporation is not subject to that) which is a tax of approximately 13% for Social Security and Medicare. This would bring the sole proprietorship net cash available lower than that of a corporation.
2.As a sole proprietor you are taxed on the business profit whether or not you take it out. Accordingly, there would be less available for business reinvestment in a sole proprietorship. The net available would be about 52% after taking into account your 35% tax rate and the 13% self employment tax.
3.Please see my earlier remarks.
Now, onto the S Corp/LLC issue. You should choose whichever is less costly to form. The ongoing cost is similar but the formation costs vary by state and locale within a state. NY is less costly for an S Corporation than an LLC, some states the opposite is true. Information in the next posts.
Here is information about the S Corporation. It is from the IRS:
S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.
To qualify for S corporation status, the corporation must meet the following requirements:
In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders.
1120S (PDF)1120S Sch. K-1 (PDF)
Instructions for Form 1120S (PDF)Instructions for Form 1120S Sch. K-1 (PDF)
941 (PDF) ( 943 (PDF) for farm employees)
Instructions for Form 941 Employers QUARTERLY Federal Tax Return (PDF)Instructions for Form 943 Employers Annual Federal Tax Return for Agricultural Employees (PDF)
Instructions for Form 940 Employers Annual Federal Unemployment (FUTA) Tax Return (PDF)
If you are an S corporationshareholder then you may be liable for...
Here is the LLC information, also from the IRS:
A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit "single member" LLCs, those having only one owner.
A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state's requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.
The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file a corporation, partnership or sole proprietorship tax return.
An LLC that is not automatically classified as a corporation can file Form 8832 to elect their business entity classification. A business with at least 2 members can choose to be classified as an association taxable as a corporation or a partnership, and a business entity with a single member can choose to be classified as either an association taxable as a corporation or disregarded as an entity separate from its owner, a "disregarded entity." Form 8832 is also filed to change the LLC's classification.
The election to be taxed as the new entity will be in effect on the date the LLC enters on line 8 of Form 8832. However, if the LLC does not enter a date, the election will be in effect as of the form's filing date. The election cannot take place more than 75 days prior to the date that the LLC files Form 8832 and the LLC cannot make the election effective for a date that is more than 12 months after it files Form 8832. However, if the election is the "initial classification election," and not a request to change the entity classification, there is relief available for a late election (more than 75 days before the filing of the Form 8832).