Which Business Entity Is Right for You?

Which Business Entity Is Right for You By Stephen J. Ganns{3:42 minutes to read} Starting a business? What type of business entity should you be? For a small business person, there are various types of entities that can be the vehicle you need to run your business.

Corporation

There are 2 types of corporations: a C-Corporation (C-Corp) or an S-Corporation (S-Corp).

Most small businesses will not use the C-Corp entity because it is simply much more than they need. This vehicle is used by larger businesses that need to retain money in the corporation or wish to issue separate classes of stock or have a large number of shareholders.

Most small businesses are basically service businesses, for which an S-Corp would be a better choice. Basically an S-Corp and C-Corp are legally the same. The difference is if you choose to be an S-Corp, you elect with the IRS by filing form 2553. The tax passes through to you and is reported on your personal tax return. Please check with your individual states and localities to see if they also accept this pass-through tax treatment.

LLC or Partnership

Another entity chosen by many small businesses is an LLC. There are 2 types of LLCs: a single member LLC, or a multi member LLC, which may be referred to as an LLP. Both types of LLCs have the distinction of being considered a disregarded entity by the IRS, which means the IRS does not have a tax return for an LLC. Rather, if you are a single member LLC, you report your income and expenses on a schedule C as would a sole proprietorship. If you are a multi-member LLC or LLP, you will file your tax return as a partnership on form 1065.

However, you can elect to be taxed as a corporation, but this then takes you back to which corporation and again, if you are a service business you will probably want to be taxed as an S-Corporation.

Sole Proprietor

The last and most simple method is simply not forming any entity at all. You report your income and expenses on a Schedule C as would a single member LLC who does not make a corporate election, and that is that.

In my next blog, I will go into the tax advantages and disadvantages of electing or not electing your LLC to be taxed as a corporation, either S or C.

As with anything, it is very important that a small business owner do his or her due diligence concerning any type of entity they form. This may lead to tremendous tax savings, or in the case of someone who doesn’t do their due diligence, tremendous tax costs.

If you have any questions on anything in this matter, please consult your tax advisor. You can also email us at info@stevengannscpa.com or call us at 914-682-7007.

Good luck with your job hunt and remember: The IRS has got your back, at least a little bit.

Stephen J. Ganns

Stephen J. Ganns, CPA
914-682-7007
steve@gannscpa.com
www.www.stephenjgannscpa.com

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