Best legal structure?

[isis297]

NY state

I have been accepted into the NYS SEAP program and one of the things I need to decide is how to establish my business. I was looking at the descriptions online and I just don't know the best way to go about this. You guys have always been so wonderful at guiding me and at least pointing me in the right direction so I was hoping you could direct me once again.

I am starting an online community platform. I don't know if that matters...

What are the pros and cons of the various structures? LLC, S Corp, C Corp...the goal would be to go global eventually which I know LLCs are not recognized internationally... I know as a business owner tax is going to be a concern so that's one of my biggest considerations.

 

[quincy]

You should make an appointment with a business law professional in your area to discuss your plans. If you are not ready to take on that expense (yet), there are several New York guides that are easily found online that explain the different business structures and the pros and cons of each.

And here is a link to FreeAdvice information on starting a business. It discusses the different business structures and other areas that need to be considered when starting a new business:
https://business-law.freeadvice.com/business-law/starting_a_business/

 

[adjusterjack]

What are the pros and cons of the various structures? LLC, S Corp, C Corp...the goal would be to go global eventually which I know LLCs are not recognized internationally... I know as a business owner tax is going to be a concern so that's one of my biggest considerations.

Looks like the SEAP has all the resources you'll need to figure that out.

https://www.labor.ny.gov/seap/index.shtm

 

[Taxing Matters]

I am starting an online community platform. I don't know if that matters...

What are the pros and cons of the various structures? LLC, S Corp, C Corp...the goal would be to go global eventually which I know LLCs are not recognized internationally... I know as a business owner tax is going to be a concern so that's one of my biggest considerations.

I assume that you are going to be the sole owner of this business, right? If so, then your choice of business form will come down to three options: sole proprietorship, limited liability company (LLC) or corporation. Other forms of business, like the limited partnership (LP), limited liability partnership (LLP) or the limited liability limited partnership (LLLP) are all forms of business that have more then one owner.

It's important to understand that the terms S corporation and C corporation are not types of business entities. They are federal tax terms that indicate how the business income is being taxed under the Internal Revenue Code (IRC), i.e. how it is taxed for federal income tax purposes.

A sole proprietorship is just you running the business in your own name. Doing that is easy to start since you don't even need to form any kind of entity with the state and since everything is in your own name the administration of the business is pretty straightforward. You get taxed on the income from the business on your own return and if you have losses you may offset those losses against other income, with some limitations. Starting out this tax treatment is usually favorable for new businesses that may initially run losses or just not have a lot of revenue at the start. The downside to operating this way is that you get no limited liability protection.

If you want limited liability protection (and it is usually a good idea) and you are the sole owner then your choices are using the LLC or the corporation. The limited liability protection offered by both are essentially the same. Their internal organization is a bit different, but generally that's not something that makes a huge difference to most single owner businesses. But LLCs are the most flexible in terms of how they may be taxed. By default, a LLC is effectively ignored under federal tax law and is taxed like a sole proprietorship. But you may elect to have it treated as a C corporation and, if you are a U.S. citizen or resident and meet the other qualifications for it, you may elect S corporation treatment. And you can start out having it treated as a sole proprietorship and then elect later on to have it treated as a S-corporation or C-corporation all without having to change how it is organized with state. It can always stay a LLC with the state.

Of course if you get to a point that the entity must be a corporation (for example, you want to raise money for the business by doing a public stock offering) it is pretty easy to convert a LLC to a corporation under state law. But once the entity is organized as a corporation under state law, your only tax choices here would be S corporation or C corporation.

The difference between S corporation and C corporation taxation is that a S corporation is taxed much like a partnership. You prepare a separate return for the corporation (Form 1120-S) but the income, deductions, and credits of the S-corporation will pass through to the owners of the S corporation and they pay the tax on the income on their returns. The problem is that the ability for you to use losses from the S corporation on your personal return is more limited than a sole proprietorship. But once the business starts making good money, the S-corporation can be a good way to go. The C corporation is rarely a good choice for a single owner business. The corporation itself gets taxed on its income rather than the owner, and then when corporation pays dividends out to the owners those dividends get taxed again on the owner's returns. That results in double taxation of the corporate income. You don't have that problem with sole proprietorship or S-corporation tax treatment.

So the bottom line here is that for a single owner business, your choice of business forms will be sole proprietorship, LLC, or corporation. Then depending on what you choose, you may have the choice of being taxed either as a sole proprietor, a S corporation, or a C corporation.

Because of the things I discussed above, most single owner businesses are best off starting with the LLC and having it taxed as a sole proprietorship. It can change the form of business or how it is taxed later on as things change. But whether doing that will be best for your business is something you would want to discuss with a business attorney and/or a tax attorney in your state. Each business is different and no single set up is right for everyone.

 

[FlyingRon]

They should take TaxingMatter's excellent discussion above and make it an article on this site. It's a frequently asked question.

 

[isis297]

...

You are awesome. THANK YOU!! I absolutely want the protection so I was thinking LLC at minimum. My concern was how things are taxed because I know in the past when I've worked as an independent contractor I was taxed at 30%. Is it the same as an LLC?

 

[PayrollHRGuy]

You are awesome. THANK YOU!! I absolutely want the protection so I was thinking LLC at minimum. My concern was how things are taxed because I know in the past when I've worked as an independent contractor I was taxed at 30%. Is it the same as an LLC?

You would be taxed just as you would be taxed as an individual.

 

[isis297]

This may be a stupid question, but I saw it looks like there are different applications for sole proprietor Federal tax id numbers and LLC ones. Can I apply as a SP and then change it after becoming an LLC or do I need to take the steps to become an LLC before I do anything else?

 

[Taxing Matters]

You are awesome. THANK YOU!! I absolutely want the protection so I was thinking LLC at minimum. My concern was how things are taxed because I know in the past when I've worked as an independent contractor I was taxed at 30%. Is it the same as an LLC?

As an independent contractor you are taxed as a sole proprietor. And a single member LLC is by default taxed like a sole proprietorship, as I discussed before. But understand that you are paying two different kinds of taxes here. You are paying income tax, and the rate of income tax depends on your total income for the year, both business and non-business income.

You also paying self-employment tax, which is the way you pay your FICA (Social Security and Medicare) taxes when you are self employed since you don't have an employer to withhold those taxes and pay part of them for you. That self-employment tax is at a rate of 15.3% of the first $132,900 of net self-employment income. Any self employment income above the $132,900 is only subject to Medicare tax which is 2.9%.

You pay half the FICA taxes yourself through withholding when you have a job with an employer and the employer pays the other half. You never see the FICA taxes on your tax return when you are employed by someone else which is why your taxes seem a lot lower when you have job compared to when you are an independent contractor/self-employed. And in part your taxes are lower when you have a regular job because the employer is paying half for you. But there is no free lunch here. The employer also pays you less because it has to pay half these taxes for you.

This may be a stupid question, but I saw it looks like there are different applications for sole proprietor Federal tax id numbers and LLC ones. Can I apply as a SP and then change it after becoming an LLC or do I need to take the steps to become an LLC before I do anything else?

The same application form, Form SS-4, is used for anyone seeking an Employer's Identification Number (EIN). The EIN is used for filing any returns with the IRS other than your personal income tax return (i.e. Form 1040). If you operate as a sole proprietor or as a single member LLC taxed like a sole proprietor you are only required to have an EIN if you have employees and thus need to file employment tax returns, maintain certain types of employee plans, or must file an excise tax return or other special return. In short, for sole proprietors you are not required to have an EIN if you don't have employees and aren't involved in a business subject to some special federal tax. However, a lot of sole proprietors get an EIN because their banks insist on them. You can get the EIN as a sole proprietor and keep that same number if you form a LLC later unless you elect that LLC to be taxed as a S-corporation or a C-corporation. If you make those elections you'll need a new EIN. If you take on partners later you will also need a new EIN because you will now have a partnership.