Author: Becky Bruso
So when I went about trying to decide how I should organize my business I gave some serious thought to how I should organize it from a legal viewpoint. My choices were Sole Proprietorship, LLC or S-Corp. There are other entity types such as partnerships, cooperatives, and C- Corps, but for me the choice was limited to three: a sole proprietorship, an LLC, or an S-Corp.
Here is how I made my choice:
Setting up a sole proprietorship is simple. You don’t need to anything but to hang out your shingle, after you have done all the necessary local permits, that is. But this ease also has lack of commitment; an easy in gives you an easy out. I wanted to have some skin in the game so I wanted to form an entity which had legal standing. I needed this psychological factor of setting my mark in the sand and moving forward with my business idea and committing to my goal.
My next decision factor was regarding liability protection and avoiding double taxation. Now, I was at the step where I could rule out a couple of entity types. A partnership or a cooperative was easy to dismiss as it is only me; can’t be a partner with myself nor do I have the collective of people with a common goal to form a cooperative. I liked the idea that the S-Corp allowed some items to be considered expenses, but its requirement that I pay myself as the sole employee a fair market rate posed a huge problem. Without any foreseeable income, how would I be able to do this realistically?
Being the only member of the LLC, the tax effects of being taxed on the entire net income of the LLC was not really a factor for me. Also, I found that the LLC could be converted within in certain time limits, to an S-Corp. In this way, if I earn enough money to pay myself within that time lime, I could convert.
In the end, I decided that an LLC was the way for me to go. Thus, my decision to become an LLC was made.
Some detailed information has been identified by the SBA in their discussion of entity types.