Inevitably, when entrepreneurs begin to think of opening the doors to their dream business, the question comes up on the best way to organize that company. As a startup business, plenty of would-be owners think that a sole proprietorship is “good enough” but, any seasoned accountant will tell you that financial responsibilities in a sole proprietorship are the worst possible way to organize a new business.
In reality, new businesses have two great options – organizing as an S-corporation or as an LLC. Both have benefits and both have some challenges, but today, let’s take a few minutes to look at how each entity is structured and see which one is right for your new business.
An S-Corporation is, at its heart, a corporation designed for smaller companies. The taxes the corporation will ultimately pay each year are passed through the company and on to the shareholders, who would then be responsible for reporting it on their personal incomes. THAT is the key to an S-Corporation – this “pass through” – if that was not allowed, then the owner would effectively be taxed twice – once at the corporate level and again at the personal level. Of course, there are checks and balances in place to prevent this and to make sure that stakeholders do pay taxes, but the benefit is that owners have the full suite of corporate deductions that can be taken before profits – and thus, taxes – have to be calculated.
An LLC is the abbreviation for a “Limited Liability Company” and, for many small business owners, represents the perfect balance between easy establishment – an LLC can often be created easily and provide many of the legal protections of incorporation. As a result, it pays to research what state offers the best
scenario for your company – even if you aren’t a resident of the state, you can incorporate in it under certain circumstances.
The key to the proper management of an LLC is to not only claim, via Form 8832, what type of entity the LLC is to be classified and taxed as, but also to manage the LLC under those rules. If the IRS is able to prove that your LLC business has been managed as a sole proprietorship, then the IRS can retroactively tax you and your business as a sole proprietorship.
For the majority of small businesses and startups, the LLC simply makes more sense. The paperwork is easy and inexpensive to file and the fact that the LLC can be treated, for tax purposes, like an S-Corporation, means that the majority of small businesses can get the best of both worlds with LLC status and the proper corporate systems in place.
On the other hand, a small business that plans to quickly bring on investors and are anticipating rapid growth or even an IPO within a short time of opening may be wise to take the time and effort to structure the entity from day one as an S-Corporation. This extra effort will allow the company to move quickly and not lose time reorganizing to pitch investors and stakeholders.
Discussions with a qualified accountant is always good advice to heed. But when thing get out of control and the IRS have sent threatening letters and notice of liens or seizures it is time to contact a Tax Resolution firm who specializes in this work. Our Company does just that. When Payroll taxes are delinquent the IRS will become even more aggressive. You can always call me @ Patrick LeClaire 407-287-6638 and we can review your case. If you are a reader then my E-Book “Trust Fund Penalty” is a comprehensive discussion of what you can expect and what you can do to mitigate.