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Which business entity are you? Sole-Proprietor? S-Corp? LLC?

Jennifer Dunn (Social Street)
asked this on March 13, 2012 06:39 AM

Today's Outright blog post is all about the difference between business entities and which one is right for your business. I'm curious as to the mix we have on here. Are you an LLC? S-Corp? Partnership? 

I'll start. I'm an S-Corp because I have employees... and because my accountant recommended that I be an S-Corp. This will be my first year filing taxes as an S-Corp so we'll see if it helps me or not! How about you? Any advice for ecommerce sellers struggling to choose a business entity?

 

Comments

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daddysellsvacs2

We are currently a Sole Prop, but have considered becoming an S Corp instead (we also have employees).  I would be interested to hear from those switched to SCorp from Sole Prop, good and bad.

March 13, 2012 05:15 PM
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alex vasquez

I'm an S-Corp. It's just me and a partner. No employees. 

March 13, 2012 05:39 PM
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racer7544

I showed my account my numbers from 2010 and brought up the idea of an LLC and he felt an S-corp would be more beneficial to me when it came to taxes. This will be my first year filing taxes as an S-Corp so I'll see how it goes.

March 14, 2012 06:56 AM
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contact

I own an LLC  myself, but for tax purposes, I elect to be taxed as an S-corp on form 2553. So I get the best of both worlds. Less documentation (LLC) and low taxes (S-corp). I'm surprised more people don't do this, nor was it mentioned that this could be done in the outright article. LLCs are more flexible than people give them credit for.

March 14, 2012 12:26 PM
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Staci Jansma

@contact - please explain more - or provide a link that has information on what you referred to - "elect to be taxed as an S-corp" "but you are a LLC". Planning on setting up an LLC in April/May - just not 100% sure if I want to go that way. Saw this question/comment - perfect timing for your response.

March 14, 2012 07:56 PM
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Jennifer Dunn (Social Street)
Outright

Agreed @Racer7544. I just visited my accountant yesterday, so we'll see how it goes my first year as an S-Corp...

March 15, 2012 06:50 AM
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contact

Hey Staci, theres actually good info on the IRS website: http://www.irs.gov/businesses/small/article/0,,id=158625,00.html

I think that most people don't understand that LLCs are state created entities and that they can be taxed however they choose, not just the default (sole proprietorship or partnership). Even some CPAs haven't caught on yet. For me it equals lower taxes and less paperwork.

From the IRS "The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file a corporation, partnership or sole proprietorship tax return."

I'm planning to write blog about how to start and maintain a LLC S-corp in CA and I'll try to post a link here later.

March 15, 2012 10:03 AM
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rbingham

I have been doing tax work for 25 years  ... first thing that I tell new Sch C clients is that they should have a business entity (ie LLC,   Corp, Partnership etc)  Do you want to grow towards a publicly traded stock company or plan on remaining small?  If small go S-Corp over C-Corp.  It is correct that the LLC is able to be treated for tax purposes any way that  you desire to have it treated.  My favorite path is to file LLC as S-Corp.  I'm looking for Home based business owners wanting tax assistance.

March 20, 2012 08:05 AM
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GeorgeSports.com

@rbingham - I am looking for tax assistance. How can I contact you? Thanks, George

April 11, 2012 12:30 AM
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sk942800

need help(tax issues) with my home-based business ...how can i contact you-rbingham (sk942800@yahoo.com)

April 11, 2012 02:29 PM
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OutrightUser

For S Corps, taxes are paid through the individual.

@ Jennifer: How can Outright be leveraged or developed to make tax compliance easier for S Corps?

April 11, 2012 03:14 PM
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Jennifer Dunn (Social Street)
Outright

Hi @OutrightUser, Personally, as an S-Corp for the past year, I've been using Outright exactly the same way as I did when I was a sole-proprietor for the three years before that. I important my bank account to track expenses and my Freshbooks and PayPal accounts to track income. I just go in about once per month and make sure everything looks okay - which generally is just changing my bank's gibberish to a payee who's name and purpose I understand, and categorizing everything. This year at tax time, I just printed out monthly profit and loss reports for my accountant and totaled them up. If I recall, this is exactly what I did last year! (I also use Shoeboxed to keep track of my receipts in case either of us ever have any questions about my spending, but he's never asked to see any of my receipts.)

As for how Outright can be leveraged, I'll leave that one up to some of our savvy accountants to answer. I do know that one of our biggest feature requests - splitting transactions - would go quite a long way toward this. Splitting transactions is one of our planned feature requests, but it never hurts to let our devs know what you want by adding your voice to this feature request post

April 12, 2012 10:20 AM
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Organisum

Sole Prop right now but try to decide which would be better. LLC or S-Corp. It's just myself and my husband starting a technology consulting business. 

April 15, 2012 06:21 AM
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Paragon Netology, LLC

We are an LLC however - we are using Outright to manage our accounting as our business accounting requirements are quite basic. By trade I am no accountant but using Outright really allows me to

see and keep a finger on the heart beat of financial part of our business. 

Year end I do a P&L report and hand it to my CPA whom then converts my data and process's all my LLC reporting. 

Dave

April 15, 2012 01:19 PM
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mwood

Hi,

I'm a new user  here at Outright. I'm setting up as an LLC. But I believe the S-corp allows you to take deductions that large corporations can take.

 Also, establishing S-Corp status better protects you from liability should there need to be liquidation. Sounds like your accountant is trying to take good

care of you! It's nice to know there are some professionals that still really look out for us, huh?

May 20, 2012 01:25 PM
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Jennifer Dunn (Social Street)
Outright

Right, Mwood? Good luck setting up your LLC! Keep us updated on how it affects your business, please! :)

May 21, 2012 08:59 AM
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Rich Brodsky

I currently own an S-Corp (even though it's just me - no employees) and just signed up  with Outright. So far I am very impressed, but a bit worried about what to do at tax time. I currently use Quickbooks and TurboTax to do my taxes. Is there any way to export data from Outright and bring it into Quickbooks or Turbo tax? What are others doing?

June 03, 2012 05:14 PM
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val

Our business operates in a corporate structure. Sure it's more complex, requires more effort, but this effort is well paid.

Assumptions:

  1. Advisers want to be correct as often as possible.
  2. Most frequently asked for advise on entity type when the owner is starting up.
  3. What do we know about start-ups?  Most fail (It often quoted that better than 80% fail within 5 years.)
  4. To write this loss off against other income you use a pass-through entity, i,e,, LLC, Sub-S, LP, etc.

Therefore the adviser makes the recommendation based on the likelihood the business will fail (or lose money). In this case the LLC or Sub-S works great. The issues arise when the business generates profits. Profits create problems. 

Only profitable businesses pay taxes. So if the LLC/Sub-S is profitable it passes the income through the K-1 to your personal tax return and you pay the higher multi-federal taxes (income, OSDI, Medicare) and state income tax where applicable. But consider, a corporation pays a lower single federal income tax on profits. Depending on the level of profits a different entity solution could apply. As a business owner, don't get fooled into thinking that "SIMPLE" is good, It's certainly easier but has proven to be inadequate when the inevitable blindside attack occurs.

One last thing, as the business owner you can't effectively hire someone to do a job you don't understand; there's no way for you to know if they are doing a good job or not. Being an independent business owner is tough and the "buck stops with you." Learn to do the taxes yourself. That way you can really communicate with the preparer you hire.It will help you understand your business so you can run it better.

August 10, 2012 05:24 PM
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dksullivan_99

I am a work from home mom. I buy all my items at full price and resell with my gemstone from my yrs of collecting in jewelry. What do I list myself as and what would be the best for me to list under?

August 14, 2012 02:01 PM
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Jennifer Dunn (Social Street)
Outright

Hi DKSullivan_99, right now, since it doesn't sound like you have taken steps to formally incorporate, you are a sole-proprietor. Which is totally fine! As for what it would be best for you to be, that's a great question for a financial pro (like we have on these boards!) but I know many people in your situation remain sole-proprietors and simply fill out the Schedule C (Self-Employed Income) along with their 1040 income tax returns every year.

August 15, 2012 05:40 AM
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Rich Brodsky

I'd like to hear from others who have S-Corps on how they use Outright when it comes to taxes. 

August 15, 2012 12:22 PM
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RME Group, LLC

I'm an LLC in the state of Georgia (just me, no employees) and will definitely look into the concept of fling as an S-Corp.  Also, I could use some tax assistance as well if there are any accountants out there.  Bob@RMEGroupllc.com

August 16, 2012 01:38 PM
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Motif Pillows

I started my business in March and registered as a Sole Proprietor but would like to change to S-Corp.  I am about to pay my 3rd quarter taxes.  Should I upgrade my business after I pay the third quarter or wait until 2013 to change from Sole Proprietor to S-Corp.  It' is my husband and I running our shop.  Any advice would be greatly appreciated.

September 01, 2012 05:13 PM
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Jennifer Dunn (Social Street)
Outright

HI Motif Pillows,

That is a GREAT question. I know I incorporated in the very last week of the year, but I think that was more because that was when I sought out an accountant rather than for any strategic purpose. I Tweeted your question and will put it up on Facebook for our finance pros to noodle over. Also - an this is totally non-Outright-related - but would you mind providing a link to your store? I'm decorating a new house and would love to see what you sell! ;)

September 03, 2012 05:53 AM
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Motif Pillows

Thanks so much Jennifer for getting my question out there.  My shop site is www.etsy.com/shop/motifpillows 

Have a great week,

Priscilla

September 09, 2012 03:59 PM
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Krunal Patel

Hello Everyone,

I am about to start my staffing firm on my wife's name and want to start as LLC considered as S-Corp but I am really confused about adding myself as a partner. I am working as an Engineer and my wife is a student. Moreover I have added her as my dependent and now starting a business on her name will screw up things. Also she is a US citizen while I am not. Any comments??

September 10, 2012 08:20 PM
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usinstallersllc

Hello Everyone,

I just found this site, mayne I can get some help here, I hope.

I am starting a business with my brother, I do the payroll and he does the work.(how great is that). He is a subcontracted, he installs cabinets. We have 5 guys working for us and I will be giving them a 1099 at the end of the year. I am not sure how to do our company as a Sole Prop or LLC or C-Corp, S-Corp. not sure of all the differences. All I know is I dont want to combine the taxes for our business with my personal taxes (if that is even possible). Can anyone give a little advice here? Which is the best way to go.   

October 14, 2012 09:54 PM
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homegrownpaper

I am currently a sole-prop LLC, if I change to elect to be taxed as an s-corp does that mean my business can save up money in an account that the business then pays taxes on, but doesn't go on my personal income?

Besides possible double taxation on the money are there other negatives to doing this or positives? For certain reasons I am trying to keep my personal income at a lower rate, and want to save up for an expensive piece of equipment anyways. 

 

thanks!

-Marie

October 15, 2012 08:24 AM
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chrispedencpa

The thing with a Sole Prop or an LLC is that the income and expenses are reported on schedule C of your individual return.  With an S Corporation, the items of income, expense and credits flow through the business to the individual shareholds to be recorded on your tax return, even if the corp did not distribute any money to you.  If any payments are made to the shareholders of the S Corp by the company, these are tax-free to the extent that these distributed earnings were not previously taxed.  A C corp is usually bit more complicated to set up, which is done at the state level.  However, it is probably a better way to keep the finances separate from your personal fiances, and taxes can be kept separate.

I hope this helps.  Let me know if you have any more questions.

Chris

October 15, 2012 04:00 PM
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peachteadesigns

wow! I just found Outright and I am impressed! I am just starting out  (praying and crossing fingers my business venture works) and looking around at all kinds of stuff I'm going to need. I have not yet even paid for a business license or my resale cert, BUT I DO have an Outright account!yay! Question...I don't even have an accountant yet..don't I need to know if I'm going in as an LLC or S Corp before I register my business??

October 17, 2012 09:00 AM
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chrispedencpa

peachteadesigns - Yes, you do need to pick a business type so that you can register with the IRS, your state and your city/county.  However, it really depends on what you want to do.  Since you are just starting out, and it sounds like it is just you, you can register as a sole proprietor, and all of your business income and expenses can go on Schedule C when you file your personal return.  The IRS registration isn't that hard (yes, I know I am CPA so I do this kind of stuff all the time), but I did it with two boys fighting in the background with a football game on the television (Hmmm, need to check that I didn't register myself as Manning Pass Incomplete, LLC).  So you can do it no problem, but let me know if you have any questions.

October 17, 2012 12:04 PM
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daniellen_08

So ive read a bunch of these comments and im sure the answer was there, but im not sure what to do.. I have an etsy account and just signed up for outright, but i have no idea what kind of business or LLC, Sole prop or whatever.. It would be just me working for my business. I have googled everything but still dont know where to start! Any help welcomed :)

October 18, 2012 12:42 PM
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chrispedencpa

daniellen_08 - It would really depend on your circumstances. What type of work do you do? Are you a crafter, or do you provide some type of professional service? If it is just you, but want to limit the amount of assets that a creditor can go after if something goes south, an LLC may be the way to go.  Let me know if you have additional questions.

October 18, 2012 02:47 PM
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Novel Innovations Inc

Hello all! I am currently a C Corp and will be switching to an S Cprp very soon.  For tax rates etc. does Outright differentiatie between a C Corp or an S Corp? If so how? Is there a way I can designate my corporation one or the other?

Thanks!

December 05, 2012 12:02 PM
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saxongamesny
Free

I am a Sole Proprietor with no employees, only been in business about a year and a half. I did take a business law class before starting, and one thing I learned that might help others - a Corporation is MUCH harder to dissolve than an SP, should that be a concern. If you are the sole owner and are unsure of the business environment, it is best not to incorporate until you feel the business is more stable. This was also confirmed by friends, one an accountant, one a lawyer. New York State just in case anyone is wondering, as of course states have different rules from each other.

December 05, 2012 06:36 PM
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Wades Home Designs

I have set up a LLC for my residential drafting and design business and have no employees. I have been told that for me, an LLC is the best based on limiting liability and I can either file as sole prop or file as S corp.  This is my first year for taxes and although my 1040 and sch C is easy enough... not sure if I should do it myself.  Has it been better for anyone out there to hire an accountant versus doing it yourself? Unlike other businesses, I have very little overhead outside of advertising and software upgrades and not sitting on a big profit but would love to hear from knowledgable people that may have insight.  Any help will be most welcomed!

Thanks!

December 09, 2012 06:47 AM
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clay

The reasons for choosing a business entity are taxes and financial security. If your business fails your creditors will want their money back and you will be expected to do so. If you are a sole proprietor then creditors can sell off most of your assets (cars, collections etc.) whereas if you establish yourself as a corporation then that corporation is an entity in and of itself and once the assets of the corporation are gone creditors can get no more. Incorporating protects your personal assets if you do it right. If you incorporate and fail to do your minutes and other paperwork a court will conclude that you really were not performing as a corporation and your personal assets will be made available to creditors. All corporations begin as a C corporation which is taxed as an entity. If you file form 2553 and elect to be taxed as an S corporation then all profits or losses will be passed along to the shareholders. If you are a C then the corporation will be taxed and your profits will be taxed (double taxed). However, if you are an S any profit or loss will be passed directly to you. Summary: Highest protection from creditors is to incorporate. Least expensive tax structure is sole pro or S. Incorporating is very inexpensive and often free and is HIGHLY recommended. Just go to your state corporation commission for instructions.

December 12, 2012 12:36 PM
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ricochet_609

Hello. I'm starting a website, & will be the only person involved.  The site will have very little overhead & I will be getting paid weekly by a 3rd party payment gateway. I have to choose a business entity & after reading above, i am not sure which would be best for my website. Any help would be appreciated

December 13, 2012 10:20 PM
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carleigh.pearce

I've been operating my small business (Ellison's Organics) for about 6 months.  I want to protect my family's assets in the event of a lawsuit (hope to NEVER go there!), so I'm thinking that incorporating is the way to go.  But I don't understand the difference between an LLC and a corporation - are they the same thing? I know LLC means "limited liability company", but from what I'm reading it seems like a corporation IS a limited liability company...help!

Also, are the tax benefits to filing as a corporation of some sort sizeable? In my state (TX) it costs $300 to file papers to become an LLC.  This is all so confusing to this "craft" person!

December 14, 2012 07:25 AM
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chrispedencpa

Carleigh - The question I have is how much does it cost to file as a Corporation.  You may want to talk to a CPA in Texas to see what the requirements are, but from what I know the reporting is more extensive for a corporation, whereas for an LLC you can still pretty much report everything on a schedule C on your personal return, but you still get liability protection not available to a sole proprietor..  A corporation does have the liability protection to its members that an LLC does, the differences is how they are taxed.  A corporation would be taxed on its earnings at a corporate rate, and any distributions to you would be taxed at a personal rate.  With a LLC, the only time an LLC is taxed is when you report the earnings from your share of the business on your personal tax return.

December 15, 2012 06:47 AM
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chrispedencpa

Ricochet_609 - What do you sell on your website?  Selection of a form of corporation depends a lot on the type of liability protection you need.

December 15, 2012 06:49 AM
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qbscomputers1

I've been in busness for about 6 years and am currently a sole proprietor.  I have no employee's and do my own taxes.  I have used accounting assistant and Quickbooks for managing accounting.  I've been using outright for about a month as a trial and I'm impressed with it so far.  I have no plans to form a LLC, S-corp or other enitiy,  I work 9-5 and run my busness on the side.  My busness is computer sales & repairs, and anything I can turn for a profit.  Would like to see outright able to import/export to/from Quickbooks. As I have to make dual entries right now. 

December 16, 2012 09:49 AM
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(ASCITS)

I have my own affiliate partner publishing music/mulitimedia company that can offer my original solo artist music and creative marketing ideas and services. I am licensed with B.M.I/H.F.A./Sony and an affiliate member with commission junction/linkshare and others. Comapny is know as (A.S.C.I.) T.S. reserved.. Contact personaly for questions or inquiries and privacy and policies are to be respected for also. Any other matter please consider your best options for all.

December 24, 2012 03:37 PM
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HiLoPlace, LLC

If your business is structured as an LLC, at what juncture should you seriously considered to structure it as a S-Corp LLC ?

October 18, 2013 11:32 PM
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Nile Coffee LLC

I own two coffee shops, so I'm set up as a Schedule C LLC.  That way if I add a partner, it can be taxed through the entity, and also works well for payroll purposes of employees.

October 31, 2013 12:17 PM
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livingGoodThings

I've been at this for about 16 months now, selling on eBay and Amazon - Sole Prop.   Outright has been great with bringing both sets of numbers together.  As far as keeping track of what I'm making vs. what I'm spending, Outright has been a blessing.  This will be my first full year and filing taxes is not something I'm looking forward too.  I'm pretty sure the business is going well and I'm in the groove.  What scares me is what I'm not doing (that I don't even know I should be doing).  I do file state sales tax quarterly, but that's about it.  I need tax help, I don't really know where to begin to get the most experienced help with my at home business.  I live in South Florida, any help would be so appreciated.   Obviously, I want to keep as much as my money as possible, God knows I work long hours for it!  :)  My email is: LivingGoodThings@gmail.com  Thanks, Laura

November 01, 2013 08:04 PM
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Legacy Memories, Inc.

My company is filed as an S-Corporation. Our taxes were filed on a separate return this year costing more money. My tax advisory really liked the schedule C that outright generates and wanted to know how to have some of her other clients use it. She suggested that I could operate as a sole proprietor or LLC because she finds them much easier to file at tax time. Per my tax accountant it is CPA's who always want you to be an S-Corp. That's what I know.

June 14, 2014 07:17 PM
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Residology Inc.

S-Corp

July 19, 2014 11:46 AM