Fran Brochstein - Mediator & Attorney in Houston Texas
Friday, April 17, 2015
Should I set up a sole proprietorship or incorporate?
“Which business structure should I adopt?”
Each option presents its own set of pros and cons.
This overview is not intended as tax or legal advice and may not be used for the purpose of avoiding any federal tax penalties.
Please consult legal or tax professionals for specific information regarding the most appropriate business structure for your organization.
This structure is the simplest. But it creates no separation from its owner. Income from the business is simply added to the individual’s personal tax return.
Advantages: Easy to set up and simple to maintain.
Disadvantages: Owners are personally liable for the business’s financial obligations, exposing their personal assets (house, savings, etc.).
A corporation is a separate legal entity from its owners, making it easier to raise money, issue stock and transfer ownership. Its life is perpetual and will survive the owner’s death.
Advantages: There may be tax advantages, including more allowable business expenses. It protects owners from personal liability for the company’s financial obligations.
Disadvantages: More expensive to set up, the paperwork and formality are greater than for a sole proprietorship or LLC. Income may be taxed twice, once at the corporate level and when distributed to owners as dividend income.
After forming a corporation an owner may elect an “S-Corporation Status” by adopting a resolution to that effect and submitting the proper paperwork the IRS. You might want to hire a CPA to assist you so that everything is done properly.
The S-corporation is taxed like a sole proprietorship, i.e., the company’s income will pass through to shareholders and be reported on their respective personal tax returns.
Advantages: S-corporations avoid the double taxation issue associated with C-corporations, while enjoying many of their tax advantages. Owners are shielded from personal liability for the company’s financial obligations.
Disadvantages: S-corporations do not have all the tax-deductible expenses of a C-corporation. The cost of set up, the paperwork and formality are greater than for a sole proprietorship or LLC. S-corporations have certain restrictions, including having less than 100 shareholders, shareholders must be U.S. citizens and it cannot be owned by another business.
Limited Liability Company
An LLC is a hybrid between a corporation and a sole proprietorship, offering easy management and pass-through taxation and the liability protection of a corporation.
Similar to a corporation, it is a separate legal entity, but there is no stock.
Advantages: LLCs provide the protections of a corporation, but are taxed similar to a sole proprietorship.
Disadvantages: Typically more expensive to form than a sole proprietorship, LLCs require more paperwork and formalized behavior.
Remember, the choice of business structure is not an irreversible decision.
You may amend your business structure to accommodate your changing needs and circumstances.