- Sole Proprietorship
- S Corporation
- C Corporation
The most simple entity and least costly up front is the sole proprietorship where very little has to be done. If you are using a trade name, you basically need to go to your county office, file a “doing business as” certificate, (which may cost anywhere from $25 – $100) and you are in business. This method is only available if you are a sole proprietor, meaning that there are no other owners of the business other than yourself.
The other 3 entities may have one or multiple owners.
Limited Liability Company
The second type of entity you can form is known as an LLC, Limited Liability Company. Whether owned alone or with others, this entity gives the same type of legal protection as a corporation but offers the tax advantages of a partnership and/or sole proprietor, which is the ability to deduct expenses even though the entity isn’t liable for them, as long as the owner is. This sort of advantage is not available to an “S” corporation or a “C” corporation.
An S corporation is the third type of entity someone can form. You form a corporation within your state and elect “S” corporation status on IRS form 2553 within 75 days of formation. Careful, some states require separate election filings to be an “S” corporation in their state. Also be aware that some states and localities (NYC for one) do not recognize “S” corporation status and so you are treated as a regular “C” corporation for those municipalities. You will need to be aware of the tax differences. An S corporation differs from a “C” corporation in that there is no tax at the corporate level. All income, deductions and tax attributes are filtered down to the owner(s) just like an LLC. The corporation offers the same advantages as the LLC, some protection from personal liability, but there is a difference in the way losses are handled and it all has to do with basis.
A “C” corporation is not often used by small business owners, but it does have some benefits. Basically, corporate income tax rates are lower than the personal tax rates that one pays with an LLC or an “S” corporation. However, disbursing accumulated profits triggers a secondary dividend tax. Not so with an LLC or an “S” Corporation.
The “C” corporation is usually used for entities that require heavy capital investments (inventory and heavy equipment) that need to stay in the company as opposed to service type businesses which are not capital intensive.
In all cases, it would be best to consult with a tax advisor before deciding which type of entity is best for you.
My next blog will deal with what is required for conducting your business properly as a corporation or LLC.