Ron Valentine with Valentine CPA joined Rick Aaron on ABC4 Utah today to talk about different small business entity types and what they mean when it comes to taxes and income.
There are many small different business entity types. Some small companies are sole proprietorships, some are corporations, and others are limited liability companies. The most popular options are Sole Proprietorship, Partnership, C-Corporation, S-corporation, Limited Liability Company.
Ron tells us that each has advantages and disadvantages. Here’s a quick summary using his own simple guidelines, but he strongly suggests that you meet with a tax accountant who works quite extensively with small businesses.
- Sole Proprietorship—use this if there is only one owner, you are not concerned about liability protection, and the net profit will be less than $30K.
- Partnership—operate under this entity type if there is more than one owner, you are not concerned about liability protection, the net profit is under $30K.
- C-corp—this entity type is not suited for small business because it is expensive to get money out of your company to benefit you personally.
- S-corp—use this if there is between 1 to 100 owners, you desire liability protection, you expect to earn more than $30k in profit.
- LLC—use this if you desire liability protection. If there is one owner, the LLC is taxed like a sole proprietorship. If there are 2 or more owners, the LLC is taxed like a partnership. But the LLC can file elections with the IRS to be taxed like a c-corp or an s-corp. (this is why I recommend you talk to an experienced accountant).
The tax code is written so that different types of income are taxed differently. For example, if you owned stock in a public company, you might get a dividend that you would have to claim on your income tax return. You are not running that company – you are just a minor shareholder. That kind of income is passive. When you run and operate your own company, you are generating what the IRS calls “earned income”. That type of income is subject to self-employment tax which is basically social security and Medicare. Operating as an s-corporation allows the owners to receive some of their earnings that are not subject to the self-employment tax. The S-corp owner needs to make sure that they are paying themselves reasonable wages for being their corporate officer.
Setting up a business is a bit complicated, and Ron recommends that you visit with a professional to get going in the right direction. You need to be compliant with all the different government entities. You also need to follow the Federal rules, State rules, and your local municipal rules. The business exists to benefit its owners and you want to make sure that it is set up correctly.
Valentine CPA is located in Layton Utah and is a full-service CPA firm that caters to small businesses. Ron Valentine is the founder and he is a CPA with a bachelor’s in accounting, a master’s degree in Computer Science, and is a former Federal auditor of small businesses.
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