Saturday, April 7, 2012

LLC, Corporation, or Sole Proprietorship?

What type of business is best for you: LLC, corporation, or sole proprietorship? This article takes a closer look at several factors and how they relate to each of these entity types so that you can make the best decision for your situation.

Startup costs

Filing fees always depend on the location, but in general, filing fees are going to be higher for corporations and LLCs than for sole proprietorships.

Sole proprietorships will generally file with the county in which they are located, though in some locations filing is done at the state level (and in just a few locations, at the city level). Filing fees could be as low as $5 or as high as $120, depending on your location.

Corporations and LLCs, on the other hand, could have a filing fee that's anywhere from $30 to $300, depending on location. Nonprofit corporations typically have a reduced filing fee.

Limited liability protection for owners

An LLC (which stands for Limited Liability Company) and a corporation both provide limited liability protection to its owners; if the business defaults on a loan, provided the company has obeyed all local, state, and federal rules and regulations and acted properly, the owners are not financially responsible for the debts or obligations of the business, and those owners' corporate assets cannot be seized by the courts to pay for them.

A sole proprietorship, on the other hand, does not provide this type of protection. There is no legal separation between the business and the person; if the business defaults on a loan, since it is really the sole proprietor him- or herself whose name is on the loan paperwork, it's that individual that is responsible to pay it back.

Tax structure

An sole proprietorship must pay a self-employment tax of 13.3% (reduced in 2010 from 15.3%); a portion of this tax goes toward Social Security, and a lesser portion goes toward Medicare. Only the first $106,800 of your income must pay the Social Security tax.

LLCs and corporations, however, are not required to pay a self-employment tax. Each of these business structures have a decision to make. There are two different tax structures for a corporation: C corporation, and S corporation, and LLCs similarly have tax structure choices to make (though for LLCs, the options depend on whether the business is a multiple- or single-owner LLC).

The tax responsibilities are extremely important to understand, as choosing the wrong organizational structure for your business can negatively impact your bottom line. It's always best to discuss your business choices with an attorney or legal advisor.

What should I do?
At the end of the day, it's important to weigh all of these options carefully before making a decision. It's easy to look superficially at the filing fee involved and go from there, but since this isn't your only true business expense, acting on filing fee alone is only looking at part of the picture.

As with every business decision, it's best to consult with your legal advisor before making any rash decision so that you know you're weighing all of the factors.
Good luck!

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