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Starting a business is exciting… until you realize there’s so much legalese that comes with starting a business.
And let’s be real: trying to decide which business entity is right for you is not that sexy. Driving revenue or rocking new projects is sexy — but this stuff is just as important. To help make it a little more interesting, we put together this video walking you through what you need to know about LLCs vs corporations.
An LLC, or a limited liability company, offers the flexibility of a sole proprietorship without the same risks. With an LLC, your personal assets are more protected if someone comes for your business.
Setting up an LLC is almost always the first step when starting your business, which isn’t our favorite. Here’s why.
Either way, when making the decision to become an LLC, you have to consider, among other things, whether you’re regularly selling a product or service, making at least a few thousand in revenue, or want to start hiring employees or independent contractors.
An LLC can choose to be taxed as a sole proprietorship or an S Corp.
If you haven't formed any kind of corporate structure, you are a sole proprietor or a partnership (if you have one or more partners). This is just a tax classification. When you form an LLC, you can choose to be taxed as a sole proprietorship. Essentially, this means you report your business earnings, income, and expenses with your own personal taxes.
On the other hand, LLCs can also choose to be taxed as an S Corp. An S Corp pays out salaries to its shareholders and only pays taxes on the remaining profit, which can lead to a lower tax rate. So in case you’re wondering, “Should I be an LLCor an S-corp?” the answer is: You can be both!
There are two types of corporations: C corps and S corps.
C corps were very popular in the 70s and 80s. However, in the 1990s, states realized how difficult it was for businesses to operate without any liability protection. So they created LLCs. With the advent of the LLC, C corps and DBAs are not used as frequently as an LLC or S corps.
S corps, on the other hand, are awesome for reducing your tax liability once you’re making at least $30,000 to 40,000 in profit in a year. Like we said above, their tax liability decreases because an S corp only pays taxes on the remaining profit after their shareholders (aka you and maybe your employees) are paid.
If you find yourself making more money than you thought you were going to, it is a good idea to talk to an accountant to make the proper decision.
When you talk to a lawyer and a certified public accountant (CPA) about which entity to choose, they’ll likely give you differing opinions. This is because a lawyer is looking at it from a legal liability standpoint, whereas a CPA is looking at it from a tax liability standpoint.
A lawyer may advise you that, to be protected personally, deciding between an LLC and corporation is important to do as soon as possible. A CPA might advise you to wait until your profitability makes you liable. Both opinions are valid, you just have to decide which is ultimately more important to you.
Okay, okay, we didn’t mean to get heavy all of a sudden. But, that’s what the business entity discussion really boils down to: a choice you have to make after considering all of your options and thinking about which is right for your business. Regardless of which you choose, we encourage you to start with an LLC — and then start separating your personal and business expenses.
If you decide to go the LLC route, you know we have you covered!
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