A Common Mistake You May Be Making
Let me start off by saying I am not a CPA or a Lawyer, and as such am not able to provide you with Legal or Tax advice. I am, however, a business woman who has been in the accounting services business for over 30 years and I have helped thousands of business owners pay less tax and keep more of the money they make.
Two questions I am often asked are “When should I become an S-Corp or a C-Corp?” and “What does an LLC provide me with?” I am answering these questions based on an entity in the USA – a number of countries will have similar laws, just different titles, so check into your country’s guidelines.
I am going to give you the rubber meets the road version of “my opinion” on these matters.
When you begin your business, I always recommend that if you are truly serious about building a business (and not just a hobby) then it is wise to begin as an LLC and open a separate business bank account with that tax id.
Here is why. It is important for people to know they are dealing with a business. Yes, you may be your business. Yes, the LLC may be what is called a Default LLC (meaning the net income flows to your personal tax return on a schedule C just as if you were a sole proprietor) AND an LLC provides you with what is called a corporate veil. In layman’s terms this means there is a layer of liability protection for your personal assets should something unforeseen and unwanted happen in your business. The limit of liability stops at the LLC (if you operate correctly) meaning no one can touch your personal assets outside of the LLC. This is a very good thing!
The S-Corp or C-Corp are actually tax designations. In an S-Corp you are required by law to pay yourself a “reasonable wage” based on your type of business. In other words, an amount you would pay someone else to do this work. You are to pay yourself this wage in the form of a W2 payroll.
A mistake I often see is people moving into this type of company before their net income numbers really warrant this level of structure.
In my opinion (and of course this depends on your entire tax filing picture) you do not require this level of structure until your net income is around that $50,000 mark.
A C-Corp is what I call the granddaddy of all corporations, and has very specific reasons for being created. It is truly a tax strategy to have a C-Corp in your picture. By the time you are ready for this kind of strategy, you will have someone in your life that is helping you with these kinds of decisions.
Of course in any situation there are circumstances as to why you personally benefit from which structure. My intention with this was to give you some insights into questions to consider as you explore which structure is best for you when.
Naturally, I’d be happy to offer a bit more personal feedback. If that is something that’s of interest to you, please fill out this form and email it back to firstname.lastname@example.org, and we’ll be in touch.
Hope this helps