Sole Proprietor, LLC, or Corporation?

When starting a business, you may be unsure about the best type of entity structure to use. There are four main options: sole proprietorship, limited liability company (LLC), partnership, and corporation. A sole proprietorship is the simplest option, as it does not require any formal paperwork to be filed. In Ohio, you can register your business name with the Secretary of State's office to reserve it. The income and expenses of a sole proprietorship are reported on Schedule C of the owner's personal tax return.

An LLC is a popular business structure that offers legal protection to its owners. Forming an LLC establishes a new business entity that is legally separate from its owners. This separation provides limited liability protection, which means that the owners' personal assets (such as cars, homes, and bank accounts) are not at risk if the LLC cannot pay its debts. However, there are exceptions to this rule, and owners may still be liable for certain debts, taxes, or personal wrongdoing. If an LLC has only one owner, there are no changes to the owner's income tax filings. The LLC is treated like a sole proprietorship, and the income and expenses are calculated on Schedule C.

When there is more than one owner, whether the business is an LLC or not, this creates a partnership. Partnerships are required to file their own tax return, and the net profits are passed down to the owners for their personal tax returns. It is important to note that starting a business with other people adds complexity to your tax situation, as it requires the creation of a new tax filing for the business. Partnerships that are not LLCs do not provide limited liability protection.

The last type of entity structure is a corporation. An LLC can elect to be taxed as a corporation, but it is not a corporation unless it makes this election. If a business owner elects to become a corporation, they must choose between S-corporation and C-corporation tax treatment. An S-corporation passes its net profit to its owners for their personal income tax returns, similar to a partnership. The S-corporation is a separate entity that provides limited liability. Many owners choose this option because it allows for additional tax savings when they pay themselves a salary from the business. A C-corporation, on the other hand, is taxed at the corporate level and not at the individual level. This can lead to double taxation, as earnings passed down to shareholders are taxed again at the shareholder level. C-corporations are typically used by large, publicly-traded companies and startups that plan to raise capital from investors and go public.

Choosing the right entity structure for your business can be complex and have significant tax implications. If you need help selecting an entity, consider seeking assistance from Davis Accounting & Tax. We can provide a tax plan that provides the best entity structure that fits your needs and saves you on taxes!