A major part of establishing a business is deciding the right entity. Not only is this a requirement for most business licences and local government, different entities also lend themselves to different tax breaks.
Let’s take a look at the 3 different business entities you should be familiar with.
Perhaps the most common entity for an entrepreneur is the sole proprietorship. This type of business entity means there is only one decision-maker in the business who will be handling financials, accounting and any core business decisions. When it comes time to file taxes at the end of the year, this is the sole person responsible for the filing.
The Need for a 1099
While a sole proprietor is someone like a real estate agent or an attorney, a contractor of a business is working independently for that business. It may seem like this is a sole proprietorship, but this is actually a 1099 employee. In this instance, the contractor would ask the business for Form 1099 (the official contractor IRS form) to fill out at the end of the tax year. A 1099 employee does not have to file for a business license or act as an independent business owner.
Limited Liability Corporation
Commonly known as an LLC, this type of business entity is the next step after a sole proprietorship. This entity may have one or more decision-makers and will see different taxation when it comes to filing season. Most notable are the protections offered by an LLC; instead of personal assets being put at risk during a lawsuit, only the business assets are held responsible. For this reason, many business owners choose to file as an LLC and keep themselves fully separated from the business.
Additionally, an LLC will require the business to file for an official license with their local county and the business will receive a tax ID. When it comes time to file taxes, the business owner will file based on the tax ID and not their personal social security number. It can be a lot to grasp at first, which is why it’s recommended to hire a professional tax preparer.
S-Corps & C-Corps
Next we have s-corps and c-corps. These types of corporations are common when there are multiple decision-makers; i.e., a company has a board of directors who are responsible for financial decisions. Unlike a sole proprietorship or an LLC, s-corps and c-corps have to file a lot more paperwork when it comes to tax season. There are typically more individuals involved which require a longer paper trail.
Just like sole proprietorships and limited liability corporations, an s-corp or c-corp will require articles of establishment and a license with the local government.
Which Entity Is Best for You?
The best business entity is dependent on the type of business you run. If you’re just getting started and it is only you making decisions, you’re a good candidate for a sole proprietorship or a single-member LLC. If a business has a larger organizational structure with multiple partners involved, an s-corp or c-corp is most likely best.
Be sure to discuss entities with your business attorney. Most firms can assist with business formations and help with any additional questions.