LLC, S-Corp, Sole Proprioter

i was advised by my tax person not to go llc first year due to costs to set up etc.
is it ok to go as sole proprietor?
thanks!

Costs can be relative to where you are located, who sets up the LLC for you, etc.

It is usually a good idea to talk to several professionals as you set all this up - an experienced attorney, CPA, etc so it can be tailored to your needs and exposure.

Unfortunately this isn’t a one-size-fits-most kind of question, so a few more details may help the folks here get you pointed in the right direction.

Best of luck to you!

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Not sure about your state or situation but LLC doesn’t really have anything to do with the federal tax situation. (State fees maybe)
In Texas it is a 1 time $300 fee to form an LLC with the state.

On the tax side-
You don’t want to elect S-corp filing status yet. (This is might be what they mean) You likely will not make enough net profit the first year for any tax savings.

While operating a single member LLC, you will by default, be taxed as a sole proprietor (pass-through income) & file a Schedule C along with your personal 1040.

Find out the LLC filing requirements & associated fees with your state. Ask your accountant to show you the cost difference between an LLC & sole proprietorship. Again, other than state fees, the Fed taxes these two the same. (Through your personal tax return)

P.S. California has high fees for LLC. If you are still in that state & haven’t joined the mass exodus to my state yet, 1st let me thank you & 2nd, you might want to skip an LLC there until you are making more dinero.

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Good info Brandon!

I would offer a caveat to the LLC - can be a single member vs multi-member LLC and they are treated somewhat differently. Again, we don’t know all the details from the OP, but a local professional is probably worth the time and $ to do it right for you.

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You are right about single & multi member LLC’s.
I always assume single member since everyone is “Starting their own business”.

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Exactly, Brandon. My LLC cost me $150.00 to set up and he filed the yearly necessary paperwork for about $100.00./year.

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Michael, welcome to our forum! Hope to see you around more…enjoy! :smile:

Yes, California wants its $800/year for your LLC and they’ll call you if you don’t pay it…

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Perhaps your “tax person” is trying to help you NOT spend your savings until you figure out if you are going to survive your first year in business. I’m sure you’re heard the statements about “surviving three years” (now “five years”). I agree. Anybody without direct knowledge or experience in this industry will likely struggle to survive, and most fail their first year.
“Be smart, not bankrupt”!
(My new Tagline for inspector advice)!!

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I was a sole proprietor for most of my career, but with the recent tax changes, made the switch. My financial advisors told me that an S-Corp gives me the best tax advantages based on our income.

Personally, I don’t really know the differences but trust my advisors. Also, we have four different companies under our Corp, which may make a difference.

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True, LLC costs are expensive and requirements are a pain. Recommend S-Corp.

Same here, I have a tax attorney who does my taxes and he has my company listed as an S-Corp.

In short, I was told an S-Corp. has the same benefits as a Sole Propieter & LLC yet it also has the same protections as a C-Corp.

It was created for businesses like ours.

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Though there may be some upfront costs with going S-Corp or LLC, keep in mind they offer more protection than what you get as a Sole Proprietor. If you are new you may be at at higher risk for making some mistakes when you are starting out. (This is also why newbies pay higher E&O premiums). For me 16 years ago, I opted to go LLC right away in an effort to gain some protection, which was advised by my attorney. There are costs associated with starting and operating a business, incorporating is just one of those costs. It is great you have a tax guy set up, but make sure you are also consulting with an attorney. Best of luck to you!!

I feel many folks are not understanding the differences between a business structure & taxation. LLC, S-Corp, C-Corp, partnership & sole proprietor are business structures. They all have different tax implications. An LLC is taxed as a sole proprietor unless it elects S-corp status.
*S-Corp will be more costly until an inspector earns more than 50k, IMO.

My LLC (in Texas) was an up front cost of $300. Nothing more to pay…ever. (there is a franchise tax if you gross more than 1.3 million per year)

You can have a single member LLC & pay taxes like a sole proprietor. This is best suited for new folks who may not make enough net profit to justify the increased costs associated with electing S-Corp filing status.
Gross revenue - operating costs = net profit (your income). You will owe the IRS approximately 25-30% of this income. [15.3% for FICA Tax + 10-15% for Federal income tax]
Suppose you make 60k in total revenue first year (150 inspections @$400 each) & have 20k in total business expenses. Your income will be 40k. You will now pay about 10k (should be quarterly) to the IRS leaving 30k take home.

S-Corp:
Here it gets more complicated.
As an S-Corp, you now are an employee of your company & a shoreholder. Your company now has to pay unemployment tax. (Possibly workers comp. Insurance depending upon your state)
You will have to pay yourself a “reasonable” wage & run payroll to yourself. Just like a regular job, you will withhold taxes from your paycheck, the employer (your company) will also pay 7.65% FICA tax on your behalf (just like any employer)
You are required to make monthly tax payments to the IRS of the taxes withheld from your employee (you) & from the company on behalf of the employee.
After all business expenses are paid (including your salary) you can take home any profit that is left. This profit is not considered “earned” income & you will only have to pay Federal taxes but not FICA taxes on this money. (That’s the S-Corp savings)

Same scenario as above:
60k gross - 20k expenses = 40k
40k - 5k for additional expenses operating an S-Corp =35k salary
35k - 6k in taxes= 29k take home.
It doesn’t make sense to go S-Corp yet.

Now suppose you revenue is 100k.
Sole proprietor:
100k -20k = 80k (your income)
80k - 24k (taxes at 30%) =56k take home

S-Corp:
100k -25k - 40k (your salary) =35k net profit
You will not have to pay the 15.3% FICA tax on the 35k.
40k - 7k(taxes) =33k take home employee (you)
35k - 5k (federal tax only) = 30k take home share holder (also you)
Total take home is 66k. That is 8k more than the sole proprietor.

Summary:
Sole proprietor if you earn less than 50k after expenses.
S-Corp if you earn more than 50k after expenses.

P.S. There are tons of different tax strategies depending upon income, retirement accounts, etc.

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