What type of business are you?

Are you a sole proprietor? Did you know that as a sole proprietor your chances of getting audited are4 MUCH higher than they are as a corporation? As financial accounting consultants we work with many CPA’s and the consensus seems clear. S-Corp is the way to go for small businesses in 90% of cases. Sometimes LLC’s make more sense and on a rare occasion a good old C-Corp is in order. We like the S-corp because it is a flow through entity. This means the net income flows from the corp to the personal returns of any shareholders in proportion to their ownership in that corporation. Based on this the income is reported ultimately on your personal return. This enables us to implement certain tax strategies in terms of payroll and pension contributions based on good solid year end planning. Here is a quick list of the entities and some information on each:

  1. C-corp – This is a normal corporation that pays it’s own taxes based on a graduated income scale and will generally result in higher taxes compared with the S-corp, which pays no taxes other than the applicable state minimum taxes ($800 in California) for net income of up to $50,000.
  2. S-Corp – the “Small” corporation. Again this pays $800 on up to $50,000 in net income in California. No federal taxes. Income Flows through to personal returns.
  3. LLC – Limited Liability Company – this is a hybrid between a corp and a partnership. You can file either an 1120 or a 1065 (Partnership return). We don’t love this because there are gross receipts taxes on LLC’s so you pay taxes before deducting ANY expenses.
  4. Partnership – this is not much different than a sole proprietorship with multiple sole proprietors. Can lead to complex accounting issue in terms of partner capital accounts.
  5. LLP – Limited Liability Partnership – A little better than a partnership, but not as good a S-Corp (this is strictly my opinion).

These are the basic ones. Bottom line with a Sole proprietorship you are exposed to audit risk as well as personal risk that the entities described above will protect you from. One bad audit can put a company out of business. It is worth the money you spend to form the entity. So where do you go to file / set up your entity? You have choices – you can go to Legal Zoom or CSC, but here’s why I do not recommend that. If you use these services you are not getting the benefit of an experienced individual guiding you to be sure you are doing everything you are supposed to. They will not tell you the process for forming an S-corp and often times you will find you missed a filing. It is much better to spend the extra money to have a personalized business who can really act as your advocate do this with you. My good friends over at Formation Solutions are a great choice for this. They know what they are doing and they will get it done for you HEADAHCE FREE!. No missed filings or details you didn’t know about because you didn’t know to ask and the website you went to didn’t know you didn’t know to ask.

Visit Formation Solutions now and call Michael or Matthew at 800-610-0373

  1. February 13, 2010 at 6:59 PM

    Let’s talk about this one Seth. I’ve had some questions about where to place myself in a business sense. I’ll email you.

  1. October 22, 2009 at 12:17 PM

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