So I want to start a business? What type of business formation should I choose? Should I be a sole proprietor, a partnership, an S corporation, or a C corporation? I’ll just set up an LLC that’s what everyone is doing now right? LOL NOOOOOOO!!!
An LLC Is a limited liability company. Basically what this means is that if someone sues you for something that you did within the business then all they can get is the total amount of money you have put into the company. They cannot go after you personally.
Did you know that when it comes to tax time there is no tax form for an LLC? Once you’ve chosen to be an LLC you have to choose how you will act. LLC owners must run their business as a sole proprietor, a partnership, or an S or C Corp. Also if you own an LLC in the state of Maryland you must file an annual report and when you file it there is a $300 fee!
When you file your annual return, they will ask you if you’re using any personal property to run your business. If you live in Frederick County, it doesn’t matter but if you live in Carroll County Maryland the county will turn around and hit you with a property tax bill. It’s not much but it adds up especially after you get my bill. LOLL
Sole proprietors are the most common and the easiest. You operate our company and at tax time you file a Schedule C with your 1040 and you will pay self-employment taxes and income taxes. If you are profitable you need to consider paying estimated taxes to the Fed and your state so you do not end up with a big tax bill come tax time.
Partnerships are great for multiple owner companies. Taxes are paid per your percentage of ownership and the profit but via a special allocation any of owners pay can be increased. Paying estimated taxes to the state and the Fed and encouraged to stay ahead of a back tax bill.
If you’re an S Corp, you will need to take a salary. The benefit of being an S Corp is that once you take a decent salary which is an expense to the business, the profit left over is taxed as a capital gain and you would not have to pay payroll taxes like social security on the profit. If you do not take a salary, then all your profit is taxed as a Sole Proprietor and this can add up. S Corps are great for single owner businesses with revenue of $50,000 and over.
C Corporations have mostly been reserved for public companies in the past but the Tax and Jobs act of 2018 offers the biggest tax break of any type of business. While all other business can receive a 20% discount on gross profit C corps can get up to 40% and this can really help you at tax time. Be careful how you select your formation and if you need help I have my calculator ready call James @ (410) 457-7331 for $FREE HELP!
James Darle Jones Sr
President, Author, Tax & Payments Specialist NetPay2K International Corp Answer Tax & Business