Once you are past the idea phase of your business and are now ready to offer your product or service to the public, you must consider protecting your business and family assets from possible losses. Failing to consider liability and risk may put everything you worked so hard for – both from a personal and business standpoint – in jeopardy.
There are several different legal structures for a business you can choose from. However, the most common for a small start-up business that will not have many employees to start out are the S-Corporation and Limited Liability Company (LLC). Here are the basics for each one:
The S-Corporation is ideal for small businesses with a reliable cash flow or whose owners have other sources of income to maintain their standard of living while the business grows. Although it is a separate legal entity, the income or loss of the company “passes through” to the owner’s tax return unlike in a C-Corp. The business files only an informational tax return with any tax due being paid at the individual level. The S-Corp provides liability protection and a tax advantage to being a sole proprietorship, but offers less flexibility with the company’s cash and requires the owners to be employees of the company to gain the tax advantage.
Limited Liability Company (LLC)
Another popular option for small businesses is the hybrid entity structure known as the Limited Liability Company, or LLC. With this legal structure, the owner gets the liability protection of a corporation. However, the IRS will tax a single member LLC as a sole propriertorship or a multi-member LLC as a partnership. One can also elect to have the LLC taxed as an S-Corp. Sound confusing? The main point to keep in mind is that each of these forms gives you liability protection. Tax treatment and advantages vary. You should consult an account about the tax advantages for your particular business. Generally, it is a trade-off of less flexibility for greater tax advantages (S-Corp) versus total flexibility and no tax advantage (LLC taxed as a sole proprietorship).
This post is solely for basic informational purposes. Given the multiple issues involved in forming a business, I recommend you consult an attorney early in the process. We are happy to help. Please call us at 215-493-8287 or send us an email HERE.