Incorporation
1. Why should I set up an LLC?
If you are a sole proprietor, half of a partnership or independent contractor (1099 employee), you will pay over 15% in self-employment taxes AND are at risk of losing personal assets to business creditors. By incorporating as an S-Corp or setting up an s-elected LLC, you can reduce your tax liabilities significantly and protect your personal assets.
2. What is a sole proprietor?
Most young business owners operate as sole proprietors. Sole proprietorship is not a business entity; it is a lack of legal identification as a business. When an individual applies for a business license and begins selling goods & services, they are acting as a sole proprietor. Personal and business finances are often indistinguishable for sole proprietors, but they could be separated into difference accounts. Sole proprietors often register a DBA (doing business as) to create a name or brand for their business. Sole proprietors are legally liable for their business; therefore, they are sued as individuals and not as a company.
3. Should I organize my business as an S-Corp or LLC?
MainStreet encourages most entrepreneurs to organize as an S-elected LLC. This provides your company the ease of operation of an LLC, with the tax incentives of an S-Corp. The ease of operation can prove more valuable than simply freeing up time, failure to comply with all of the corporate regulations can jeopardize your legal protection. It is estimated at over 90% of small business owners are not 100% compliant with these standards.
4. If I already have an S-Corp, can I switch to an S-elected LLC? Is it worth it?
Yes you can switch, but the decision to switch should be based on the age of your corporation. Once your corporation has been in existence for 3 years, it becomes credit worthy. You are then able to borrow money under the corporation’s credit and do not have to rely solely on the credit of the owners/shareholders. If your corporation is within it’s first year, we usually recommend that you switch, after that, you should maintain the corporation.
5. Since incorporating protects my personal assets, is there a way to protect my business assets too?
Yes; Just as an LLC separates you from your business, separate entities can be created to separate assets from your everyday business operations and liabilities. By holding all of your company’s property and assets in a single parent company and leasing them to “operating companies,” they are protected from business creditors. Those suing your company for damages can only sue your operating company with which they did business; which, does not “own” anything to lose.
6. What is self-employment tax?
It is a 15.3% tax for Medicare and Social Security on net income. When a paycheck is received from a regular employer, 7.65%, half of the 15.3% tax, is taken out of the employee’s check. The other 7.65% is paid to the IRS by the employer. When an individual is self-employed, their income is subject to the same tax; however, they have to pay both portions, as the employer and employee! In an S-Corp or S-elected LLC, business owners can choose a “reasonable salary” to be subject to this tax (approx. 33% of their income). In this way, only their salary is subject to the 15.3% tax and the rest of their income is distributed without the tax.
7. Can I have an LLC if I don’t have any employees?
Absolutely! An single member LLC can be very beneficial to many people including 1099 contractors. Anyone who is self-employed with no employees should organize an LLC to protect themselves and save on taxes. MainStreet specializes in single member LLC’s.
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