The time has finally come for me to strike out on my own. I’m ready to start my own engineering consulting company and I already have a major client.
I have done some research and I am still not sure if LLC or S Corp is the way to go. Here are the facts:
I will be the sole employee. I’ll be selling services, not equipment. All of my pay will come from selling my time and from getting commisions from certain manufacturers. I will be working out of my house. There won’t be any investors or shareholders.
If there’s anything else needed to know to answer this question, feel free to ask. I apologize if this question can’t be answered without a lot of detail.
I’ve heard conflicting things on this (and was, in fact, just on the phone in the last 15 minutes talking to an accountant and asking similar questions).
Take 1: LLCs are for real estate holdings, otherwise you want an S Corp (which is a regular corporation but requests a different tax status from the IRS).
Take 2: LLCs can now do everything that S Corps can do, but better. They slice, they dice, they julienne! So why bother with an S Corp?
Would love for an accountant and/or lawyer with the real scoop to clear this one up.
Oh, also meant to say, “Good Luck in your new venture, hajario!”
And let us know exactly what kind of work you’ll be doing so we can try and steer business your way. Gotta network now that you’re out in the big cold world by yourself.
Wow, ShibbOleth, I am going through the same exact runaround.
With an S Corp you get screwed on taxes.
An S Corp has major tax advantages.
I’m seeing a guy on Monday morning to help with this but I wanted some general knowlege first.
Thanks for the good wishes. I don’t want to put too much about the business here because it involves some proprietary stuff plus it’s against the rules to shill on the boards. My one major client will be more than a full time job for a while anyway. If anyone is really curious, they can email me.
IAAL, corporate, in Illinois. I am not your lawyer, and you should use a lawyer/accountant in your state to set your entity up properly.
If you want to discuss entity-selection (in a completely hypothetical, sterile and theorectical kinda way), here is a small contribution for your consideration.
Small businesses with a single owner should generally not be formed as C corporations. C corporations require the payment of 2 levels of tax: once when the corp earns the money, and once when the owner pays himself a dividend of the corp’s profits.
S corps and LLCs have the same tax position. There is only a single level of tax paid by the owner (the entity is ignored as a “pass-through entity” for tax purposes and it is assumed that all profits are paid to the owner for tax purposes (even if some profit is plowed back into the business in reality). 1 level of tax is cheaper than 2 levels of tax.
LLCs are more flexible (you can write wonderfully complicated control and buyout provisions) and there are a number of limits on S corps (S corps shares can’t be owned by more than 75 persons, trusts can’t own S corp shares, etc.).
A sole owner/sole employee/sole investor business probably doesn’t care about any of the stuff in 3–he’s always gonna be 100% in control/get 100% of profits.
LLCs are slightly more expensive to maintain from a corporate fee/annual report/lawyer time for drafting more complicated documents (corp formation document is often a form while the LLC formation document is usually custom drafted–see the complicated but flexible stuff above) perspective.
So…
A one-man shop may go with the S corp over an LLC. The tax result will be the same if an LLC is selected. It is a C corp that has a bad tax result. (Even in a C corp you can limit taxes by paying most profits in the form of salary–so long as the salary is reasonable for the type of work done.)
Even a one-man shop should consider using an entity of some sort to avoid unlimited personal liability for the owner if there is a problem. Some small service providers may decide to go without an entity (remain a sole proprietor) if there is a very low level of possible risk–hair cutting, catering, yard service, etc. If you will be signing contracts promising goods or services, you probably should have an entity–if it’s important enough to write a contract for, the possible damages are probably large enough to make it an issue.