First Business: LLC or Corp? Taxes?

[robjordan88]

Hi,

I'm new to the forum and this is my first post.
I want to start my own web design/seo business. It's just going to be just me and my computer essentially. So, where do I start as far as forms and taxes and all that stuff? Do I become an LLC, INC or Corporation?
I just want to make sure everything is done correctly with the IRS and I create my business correctly.

Thank You!

[vangogh]

Welcome to the forum Robert. It's up to you which business entity you choose. Each has its pros and cons. The easiest thing is to become a sole proprietor. You don't have to do anything to become one. The IRS will see you and your business as the same thing. When you fill out taxes there will be some different forms to fill out. That's really all there is to it, though you'll wan to register your business name with the state you live in. Look for the Secretary of State website for your state. That's usually where you can register your business name.

An LLC offers limited protection for assets you have outside the business. It's a little more work and money to set up, but hardly a lot of either. Other types of corporations will separate you the person from the business and they'll each take a little more work and money to maintain.

Odds are you'll be fine as a sole proprietor or an LLC. You can always change entities too at a later date.

[turboguy]

Vangogh gave you a great answer. I will just add one thing. A sole proprietorship, an LLC and an S-Corp at all taxed the same. The taxes flow through to your personal return. However a C Corp structure does incur more taxes since the income is taxed to the corp and then what you take out as wages is taxed again. If your business has little risk of harm or liability then a sole proprietorship might be the best choice and once it is going and profitable you could incorporate. I ran my business for ages that way and never incorporated until 1997.

[Fulcrum]

However a C Corp structure does incur more taxes since the income is taxed to the corp and then what you take out as wages is taxed again.

Correct me if I'm wrong, but I thought dividends were double taxed rather than wages.

[turboguy]

You are correct. We both are actually. Here is a better explanation.


Understanding Corporate Dividends
If you are currently operating as, or plan to form, a C-Corporation (a corporation that has not filed an s-election with the IRS) then you have probably heard the term “Double Taxation”.

In order to understand double taxation, you must first understand how corporations are taxed. Corporations are considered entities unto themselves and are completely separate from their owners (called “shareholders”), thus they are also taxed separately (called “corporate taxation”).

Unlike sole-proprietorships where all income is considered taxable, then you are allowed certain deductions, corporations are taxed solely on the profits, right from the get go. To put it simply, whatever is left over in your corporate bank account plus any disallowed expenses (such as when you used your corporate card to pay your dog’s vet bill) is what is taxed. Great right? Well, maybe… after all, all roses have thorns and corporations are not exempt.

As a sole-proprietorship it is easy for you, as an owner, to take money out of the business. You don’t have to make any formal distributions of profit – you just write yourself a check. As a sole-proprietorship, all of the money is pretty much considered yours right from the get go. However, corporations are different. Being entities completely separate from yourself, the IRS requires you and your Corporation to keep all income and expenses separate.

Corporations are superior entities, for sure, but along with the refinement comes restrictions. Shareholders can only remove profit from the Corporation according to their ownership percentage. For instance, if you own ten percent of the company, you are legally only allowed to take ten percent of the profit. These payments of profit to the shareholders are called Dividends.

[Fulcrum]

Thanks Turboguy. Looks like the Canadian and US corporate structures are viewed similarly by the tax/legal authorities.

@OP, if you do set up as a proprietor keep a set of books specifically for the business and keep all your business expenses separate from your personal expenses. This will make things easier when tax time rolls around.