Many of us dream of owning our own business. Maybe it’s because we want the option of working from home. Maybe it’s because we want to be our own boss. Often we hope we can make more money as a business owner than as an employee.
Regardless of our reasons, once you start earning money (whether it’s your primary source of income or a side business) you need to take steps to protect your family’s personal assets from a law suit due to your business activities.
The first step to protecting your family is to register your business with the State. Whether you register as a for Profit Corporation (Inc) or a Limited Liability Company (LLC) – both put a layer between your business activities (and liabilities) and your personal assets. They serve the purpose of protecting your family.
However, there are distinctions between the two that get pretty specific depending on what your ultimate goals are for your business.
After reviewing the Colorado guides that describe the difference between a S Corp or LLC, here’s what I’ve decided:
- If you have no intention of ever having employees then go with an LLC. The tax paperwork is easier and the protocols seem less cumbersome.
The cost of establishing an LLC in Colorado is about $100 = $25 to register the name of the company and $75 to register the company. Each state is different, so I recommend asking the Secretary of State’s Office for your particular state.
If you are establishing a business with a partner (even if it’s your spouse) then there are additional considerations. Whether you establish a S Corp (which is a variation of an incorporated company) or LLC affects how you are legally allowed to share the profits. If you want to be able to divvy the profits up however you want then stick with a LLC. A S Corp mandates that each partner’s ownership of the company (described as shares owned) determines how much of the profits (dividends/distributions) each partner will receive. Of course you can circumvent this with providing bonuses to each partner to adjust for varying level of effort during the year, but then the tax benefits of a S Corp aren’t realized.
S Corp Tax Benefit
S Corporation is a tax status with the IRS that is established by filing form 2553. The benefit of a S Corp is that you pay fewer taxes on the dividends/distributions you recieve as a partner in the business than you do on the salary you draw from the business. This is sometimes referred to as avoiding being double taxed (corporate tax + individual income tax). Your salary is taxed for both social security and medicaid, but your dividends are not.
I’ve had a LLC for two years now and also have a sole proprietorship due to being a real estate agent. I did not form a LLC for the real estate activities because I pay for errors and omissions insurance, but now that I’ve learned more I will probably form a LLC to add an extra layer of protection for those activities as well. The LLC that I formed was for our remodeling, staging, fix and flip business – Simply Stunning, LLC that I established two years ago.
Since both are sole proprietorships, I’ve found the taxes to be very easy. I’ve had no issues using TurboTax to complete our taxes – even with the LLC and sole proprietor businesses. Taxes for both essentially boil down to a basic profit/loss statement. I don’t know that they’d be as easy if I had partners or employees.
Starting My Business
I am currently forming two businesses – one for my blogging/social media activities and another for a consulting firm I’m starting. I hope to expand the consulting firm to include employees; however, I don’t currently have any contracts in place. Therefore, I’ve decided to start both as a LLC and once I have enough contracts (income) I will consult a tax attorney to understand how to meet the requirements of a corporation.
I am by no means a tax attorney or CPA and am simply sharing my insights as I researched this for my own use.
I would love any additional information anyone has on the differences between the business format options. I am also happy to answer any questions (to the best of my ability) that you may have.