Sole Proprietorship vs. C Corporation vs. S Corporation vs. LLC?

We are a C-Corp. It is the only entity that can give unlimited non-taxable benefits and allows you to have a tax year that is different than a calendar year.

 

We setup as Florida Sub-S which is fine. I wouldn't setup as a C-Corp unless you are making a good bit of money. C-Corps are taxed in addition to your own personal taxes, it's true though that C-Corp's can expense almost anything. That said you have to have the gross income to support it and full time employees.

As a Sub-S you take about half as W2 (normal) income and the rest as K1 (profit). You can expense things as a Sub-S that are business related and used by the business or employees to do their job.

I don't know enough about LLC but it seems a lot of people use it.

If you are just starting out and have no employees or only contract them out, I would stay under the radar and be a sole proprietor as long as possible. There's no extra expense to have your Sub-S or C-Corp (even more) taxes done every year. Ours used to cost $650 a year, now we have bookkeeper on at about $200mo to handle all of it including tax reporting.

 

LLC works pretty much like an S corp.

 

There are very real advantages for not being a sole proprietor. If you have have anything go wrong in your business, whether it's a injury from something you installed (overhead sign) or Harley Davidson coming after you for a trademark violation, they can take everything you own. Your business, your house, your car, empty your bank account, etc.

Setting your business up correctly means if anything like that does happen, the liability stops at the door of the business and all your personal accounts and possessions are safe.

 

Quoted for the truth^^^^^^^^

You need to "divorce" yourself from your business.

 

Yep. Some places you can also set up a LLP as well. But I think that is done by individual state. Some business have to be set up as a Partnership, but some will allow LLP (accountants and lawyers are usually set up as partnerships, I actually don't know of any set up differently come to think of it). I personally wouldn't do a partnership, even an LLP, but that is another method open to you.

 

As far as liability. The Sub-S and Sole Proprietary are the same, as far as I know.

Only a full C corp or LLC (as I remember it) allows for a complete disconnection.

All that said. If you have to sign for a loan or equipment, you are still personally liable for the debt.

@TXFB.INS - Have you called a CPA or Tax Lawyer? You can probably get more specific advice with an hour or two consultation.

 

We are an S Corp. It's the only way to go:

Sole prop is nothing more than a business license. You and all of your assets (including personal) are on the hook if something goes wrong. This includes litigation and creditor protection. All profit is taxed as ordinary income.

An LLC can choose to be taxed as an S Corp, which is fine. It offers a little bit more liability limitation than a sole prop.

An S Corp (as has been stated above) can pay dividends to its owners. These dividends (profits) are passed onto the owners at a lower tax rate because the company does not have to pay the employer share of federal income tax on that portion. You must pay yourself a reasonable salary or wage, which is taxed as ordinary income. The corporation does not pay any tax - it simply passes profits through to the individuals.

A C Corp makes sense ONLY if you are doing a LOT of sales (read hundreds of millions). Again, as stated above, a C Corp can write off just about anything as a business expense. The biggest downside - and it's a HUGE downside - is that the corporation pays tax in addition to the individual owners. It's a double taxation situation.

Let's consider the following circumstances:

The company makes $100,000 INCLUDING the owner's salary.

• A Sole Prop pays no tax on profits. A Sole Prop owner would pay ordinary income tax on $100k, or 25%. The company is responsible for the employer share of taxes, which is currently 6.45%. Tax is $31,450
  
• An LLC not choosing to be taxed as an S Corp would pay no tax on profits. However, the owner would pay ordinary income tax on $100k, or 25%. The company is responsible for the employer share of taxes, which is currently 6.45% Tax is $31,450.
  
• An S Corp would pay its owner a normal salary of say $50k. The remaining $50k would be passed through as a dividend. The corporation would pay no tax. The individual would pay ordinary income tax on $50k (which is still 25%, because dividends count towards adjusted gross income, bumping the individual up a bracket) and 25% on the remaining $50k dividend. The big difference here is that the corporation will only pay the employer's share on the first $50k that is defined as salary. The total tax is $28,225.
  
• A C Corp pays tax on its profits, as well as the owner paying tax. Currently, a C Corp pays $7,500 plus 25% on amounts between $50k and $100k. They are also responsible for the employers share of tax (still $3,225 for their 6.45% of the $50k salary). Total tax is $35,725.

I only consider taxes here, but there are other consequences to consider. You should talk to your lawyer, CPA, and financial advisor before choosing what entity to use for your company. I am NOT a CPA and don't claim to be.. But I've read a lot on this subject in general. This advice may not be a fit for everyone, as all situations are different.

 

LLPs do as well, but Partnerships have their own issues. Not the way that I would go, but it is an option.

 

This is incorrect.. Liability is a tricky thing. If you're a one man show, it really doesn't matter what entity you are; you're probably going to be on the hook no matter what. Also in terms of negligence, entities offer little protection (let's say you have worn out tires on your truck and know about it, have a blowout, and cause an accident, or use insufficient mounting methods for a sign that falls and hurts someone).

That said, all of the entities offer about the same level of protection from litigation, assuming negligence is not a factor. Accidents and employees causing a liability are limited to the company. Personal assets cannot be attacked unless you are negligent.

On the personal guarantee, you're only on the hook if you guarantee the debt. Only do that if the bank requires it--the larger you get and the more credit history you can build up for the company, the less likely you are to need to personally guarantee a loan.

 

That may be a state thing. In TX and in TN, it doesn't matter the size (one man or 50 man) you are protected as far as personal assets. I know this, because when I was in the horse industry full force, that was what most people are for that very reason and in that industry chances of "accidents" are much more likely.

My dad could go into this much more. His specialty was tax and contract law and he actually had his CPA as well (he had an LLM in taxation too).

Best thing is to talk to attorney about the liability end and a CPA for the tax angle.

 

I was referring to the one man show angle, because if you are the one who is negligent, and you own the corporation, you are liable from two angles.

If an employee is negligent, but you as the owner had no knowledge, there is some protection.

The same would apply if you had a thousand people working for you, but you made a negligent move, you could still be held personally liable. This is one big reason we have a lot of our money in a whole life insurance policy--it's protected from creditors and litigation. Different trusts could also accomplish the same thing.

 

Thanks cdiesel for all the details. This year will be our biggest and I was about to ask about switching from Sub-S to C-Corp. Looks like we should stay as is for now.

 

If it can be established that the negligence was done in the course of the employee's job, there isn't any protection. Now if they were negligent outside the boundaries of their job, then there is protection even if it was done during the course of job hours.

It's a sticky area that's for sure. Lots of ways to play around with it.

 

It's basically a matter of whose lawyers are better. However, if you are operating as a sole prop, even the weakest of lawyers will make you pay if your company has liability in a matter. Better to do everything possible to protect yourself and your assets.

Think about this: Many large companies don't own their own equipment. Whether we're talking about printers or tractor trailers, they're usually separate from the operation business. Most of the time, the equipment is owned by a holding company. This is another degree of separation in case of issues.

 

the whole "im incorporated so im separated from liability" is a MAJOR myth. god help anyone that thinks the are safe under that umbrella.