Posted on 7/24/2017 2:04:00 AM
This question comes up very often in wedding forum as vendors considering what's the best way to operate their business. There are all different types of business entity, Sole Proprietorship, DBA, LLC, S-Corp, C-Corp. The following is just my general understand the difference between them. Each state has it's own law governing business. It's best for you to consult a CPA for advice.
Sole ProprietorshipFor part time side business that sale volume is not high or steady, running as a sole proprietor is enough. That is to minimize start up cost as you might just need to register with your city for a business license. and a seller permit from your state tax board to collect sales tax on behalf of the state. However, many business/corporate client do not want to deal with individuals. If your client base is like that, you might want to consider incorporating your business. However, as an LLC in California, there is a minimum tax payment which is $800 a year no matter you make money or not.
DBAIf you run as sole proprietor, and you have a fictitious business name, you will need to register with your city as a DBA (Doing Business As). With a DBA, you can open a business bank account so you can accept check write to your business name. However, if your business name is close to your personal name. For example, Roy Rayman Films. You should be able to deposit a check to your personal account with that name. Thus, you do not need a DBA.
Both sole proprietorship and DBA are not incoporation. You will be filing your business income tax return together with your personal tax return using Schedule C. The downside for such as, during a personal income tax audit, or business income audit, both of your personal finance and business finance will be audited together.
Since your business and you are the same entity, in case of losing a lawsuit that involved financial compensation to the plaintiff, your personal assets (your house, your car, bank balance) will all be garnished. Therefore a good business insurance is very important.
LLCIncorporating your business is a good way to separate your personal assets from business. There're different types of incorporation such as LLC, LLP, S-Corp, C-Corp. Most common ones for small business are LLC and S-Corp.
If you are only personal in your LLC, it is called "Single Member LLC". IRS will considered it as a "Disregarded Entity", you will still be filing business tax return with your personal tax return using Schedule C.
Despite everybody thinks LLC can protect your personal assets from business, IT IS NOT ENTIRELY TRUE. If you are the only member in the LLC, during losing a lawsuit to your company, for any excessive amount after your business insurance pay out, the plaintiff can initiate another lawsuit against you for the rest of the amount. If someone sue you for $2m and you have a $1 business liability insurance. Your customer can choose to sue you personally for the rest of the $1m since you personally own your business, your business is you. Therefore, again, it is very important to have a good business insurance policy.
S-CorpFor S-Corp, it requires by the law with a lot of paper work and documentations. S-Corp owner also need to hold shareholder meetings and to report minutes of each meeting. Compared to LLC, which has a simpler company structure. There is only minimal paper work. However, it does not give you maximum tax savings. Many times your business income will be taxed twice. Business pay out tax on profit first. Then when you decide to take some of the profits home, that amount will be part of your personal income and thus, subject to be taxed the second time (Double Taxation). S-Corp adopt a "Passed Through" method that there is no income tax at corporate level, only in personal level.
LLC Elected Taxed as S-CorpRecent years, IRS allow LLC pay tax like S-Corp. It is called "LLC Elected as S-Corp". It has the best of both worlds. No heavy paper work like an S-Corp, but no double taxation like an LLC.
There is also a huge tax saving benefits for being incorporated. For your personal tax return, the tax dollar you paid is not deducted as expense. However, for a incorported entity, all the tax that you paid is considered a business expense that you can write off as business expense.
There is a myth that IRS will allow new company for not making profit for the first 3 years. If you continue to show negative balance in your business return, it might trigger an IRS audit. In many cases, IRS will see your new business is actually more like a hobby. You will not be able to deduct equipment purchases (such as camera, computer) as business expense. .
Employment TaxIf you decided to incorporate your business, you will be considered a fulltime employee to your business. Thus, you will need to pay yourself a salary. Same like any job you have worked for before, you will need to issue pay stub to yourself, withholding a percentage from each paycheck for income tax, as well as payment for Social Security and Medicare.
If you are self-employed, there is another tax saving benefits of incorporating your business from self employment tax. For Sole Proprietor and DBA, since you need to report income in Schedule C with your personal tax return. The entire return are subject to self-employment tax currently at about 15%. For corporation, the 15% employment tax is only calculated from the salary you decided to pay to yourself. There is no straight number on how much you need to pay to yourself. IRS will just use common sense to see if the salary you paid to yourself is enough for a living. Otherwise if you pay too little to yourself, IRS will impose a penalty.
Please feel free to leave comment. If you think I made mistakes in the article, please let me know so I can update the content. Thanks
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