With no expectations of partners or selling equity to investors, an S corp and an LLC will perform nearly identically for you for tax purposes. (As an aside, if your biz takes on employees and grows to the point where the company's income can be partially attributed to things other than strictly your personal efforts (capital, employee base, e.g.)) then an S corp may have a slight edge over an LLC with respect to self-employment tax. Your CPA can fill in the details.)
The decision then comes down to fees. Have your CPA give you a side-by-side comparison of the S corp vs. LLC fees, which will have 4 components:
1) Set-up. Frequently an attorney is used to establish an LLC or an S corp. But this isn't necessarily required in the context of a small (esp. 1-owner) entity, and perhaps the CPA can file the necessary documents with your state's Secretary of State office. Or, after a visit to your state's SOS website, you might determine that you can set it up yourself. If you don't go the DIY route, there will be fees either to your atty or to your CPA. Also, once a corporation is established with the state, there is one additional form to file with the IRS in order to make it an "S" corporation. But it's a simple form, and the incremental fee from the CPA for filling it out shouldn't be much.
2) Initial fee, if any, to the state. For many states, a corporation is charged a smaller fee than an LLC.
3) Annual fee. Most states impose an annual fee on LLCs and corporations. As with the one-time set-up fee, these may be different amounts for an LLC vs. a corporation.
4) Annual professional fee for tax return preparation. Your CPA can give you an estimate of what the cost will be for preparing the return of the entity. Depending on the situation, an LLC may have an advantage here if it can be treated as a "disregarded entity" and hence not entail an actual return separate from your own 1040. Again, your accountant can supply the particulars.
With the tax consequences being identical---or nearly so---as between an S corp and an LLC, your decision will come down to a comparison of the fees as I've described. Best of luck!
Thanks a lot for the advice. It sounds like they are pretty similar, I am planning on calling my CPA next week so this will give me some questions to ask. I htink she said the total cost will be $280 including the state fee's and her fee, I could probably use something like legal zoom but the cost isn't that much different and I would feel better having someone that does it on a regular basis do it to make sure everything is done correctly.
If you start a company and then want to change company type is that a very big deal or do you just go through the process as if you were setting up a new company again and then just transition over to the new company. I would imagine doing this as close to the first of the year would be easier for taxes.
Welcome, As I have said many times in the past, the BEST suggestion is SCORE
SCORE is America's premier source of FREE and confidential small business advice for entrepreneurs.
SCORE offer advice online and in- person at one of our 364 offices nationwide.
1 of 1 people found this helpful
Selecting the right entity form can be tricky. There are a number of things you should be looking out for before making your final decision. For online business operations, there are pending pitfalls looming. One of the things you have to look out for is state tax issues. Typically if your business does not have physical operations in a state and someone from that state buys from your online store, you do not have to add & collect sales tax from those purchases. This is called nexus. Nexus in some states isn't totally based on a physical building in that state. Sometimes, even if you have an employee in that state that works from home, you may be considered to have Nexus in that state. You should research very carefully each state that you have had online sales in the past and see which ones that you have Nexus in. There are a number of states that are trying to propose laws that would tax those sales even if you don't have physical operations in their states. Your failure to collect these taxes will not stop these jurisdictions from pursuing you. Also, having a multi-state tax return would increase the complexity of your internal bookkeeping and end of year income tax return preparation.
Also, you should carefully discuss and analyze your previous years of operations & and future business plans. Analyze how those numbers (and future planned transactions) would look if you chose either form of entity for your business right now. All of these things together will give you a blueprint of what entity you should select. If your CPA is good planner and understands your operations, they are in the best position to help you make the right choice. If they are not versed in this type of planning/consulting, you should seek out someone who has been down that road. All CPAs aren't good at all things business/accounting. They all come with different skill sets.
I have a online retail business and just finished year 2. I am about ready to incorporate and the CPA that I go to for taxes every year does the paper work and suggested we start as a S-Corp, I trust what she says but I would like to get some advice from other business owners and see if anyone has advice that supports or contradicts this.
I would imagine the name of the game is how to keep more money in my bank account, I have read up online but still not clear on what the differences between them would be.
I am the only one that owns the business and I have no plans of ever selling stock or taking on partners or outside investors. I may eventually hire a few employees but not for a year or two most likely.
Any advice is greatly appreciated. Thanks.