Starting A Small Business? Find Out Which Entity Is the Best Fit For You.
With so many folks working from home due to Covid, we've seen a spike in the creation of new small businesses. This is great news! Owning a small business has so many benefits including the potential for financial independence and the ability to be your own boss. One of the most common questions we get from our clients who are taking this leap is how to select an entity. And while your mind is probably in overdrive with all the balls you have to juggle to get your company off the ground, choosing the right entity for your business is one of the most important decisions you’ll make. So read on and discover our recommendation for which type of entity is the best fit for new small businesses.
When it comes to selecting an entity for your small business, you have 4 choices—Self Employed Individual, which includes single member LLCs (SMLLCs), Doing Business As (DBAs), or even just using your own name; Partnership; S-Corp or Corporation. Let’s break down what each of these means so you can determine the best fit for you.
Self-Employed individual: Tax filing for self-employed individuals is part of your personal return and you should plan to pay quarterly estimates if necessary. However, there’s no need for payroll. Considering a DBA? These types of entities use your social security number.
Partnership: A partnership is basically more than one self-employed individual working together. A Partnership files its own return and flows through to the owner. And once again, no payroll needed.
S-Corp: When it is the right choice, an S-Corp is great. However, we tend to see it used and abused, which is just an IRS audit waiting to happen. S-Corps are way over sold by lawyers and accountants that either don't know enough about them or are potentially seeking higher fees from you. An S-Corp files its own return and flows through to the owner. Take note that you must have payroll, and additional legal paperwork is required.
Corps: These are not as common as in the past. Corps file a separate return and pay a corporate tax rate. Just like an S-corp, you must have payroll, and additional legal paperwork is required. However, with this option, there’s no flow through and there is potential for double taxation.
While we thoroughly enjoyed geeking out with those explanations, we know you’re here for the good stuff. So which do we recommend? For most just starting out, the best is SMLLC—it's cheap and easy to get started. But there are few things you need to know first:
This route gives you liability protection of an LLC without the hassle of putting yourself on payroll and the ongoing requirements of a corporation.
DO NOT list your spouse as a co-owner if he or she is not involved in the business. In doing this, you’ll unintentionally create a partnership which might not be necessary to accomplish your legal goals.
The IRS considers a SMLLC a 'disregarded entity'. Translation: The IRS groups SMLLCs, DBAs and sole proprietors as the same thing.
Filing taxes for your small business comes down to adding a few extra pages to your return. However, those few pages are not something you'll want to tackle on your own. Hire a nerd.
Getting a small business up and running is a monumental task, and you should have all the support you can get. If you’d like to discuss your bookkeeping and accounting options with an expert, give us a call.
603-432-8291
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