Though I by no means am going to tell anyone what is best for their company structure, I can share a bit of what it’s been like for me. And if you want more specifics, I suggest reading more about incorporating vs. sole proprietorships.
For as long as I’ve had Jess LC, it’s been a sole-proprietorship. It was simpler that way, I wasn’t insanely worried about getting sued (I didn’t have limited liability under my sole-prop), and it didn’t make too much difference on the taxes I owed.
But this year after speaking at length about the decision with my accountant, I decided to form the S-Corp. I will also say right away that many people in Gen Y and Gen X seem to lean toward Limited Liability Companies (LLC). Though my accountant, who is a bit more old school, advised me the S-Corp direction to save money on taxes. It seems that LLCs are helpful for those with partners in their businesses, those dealing with real estate, and businesses with high legal fees. All of which didn’t apply to me.
Before I get into anything too specific, I hope that my advice and content in this post is seen as generally helpful, but not a professional opinion. To be honest, I don’t know too much more than what I share below.
So after you read this and you consider incorporating or creating an LLC, I suggest you talk with your own accountant.
Phew, okay, now here’s what I’ve picked up from my accountant that may be helpful for other people as well:
- If your worried about getting sued, and you have assets you wouldn’t want to lose in a lawsuit, incorporating or forming an LLC will provide a wall between your personal wealth (home, car, etc.) and the business’ assets. For most people starting small businesses that don’t involve children, safety, chemicals, etc. this may not be a serious concern at first.
- Sole proprietorships just need a Doing Business As (DBA) in most cases. As well as filing a Schedule C tax return at the end of the year.
- If your profit (not revenue) is somewhere around $25k-$35k, then incorporating your business may save you money on your taxes. This is because you can create a “salary” for yourself that is below your total profit, and the profit above the “salary” is taxed at a lower rate. When you are a sole-prop all of the profit is taxed at the higher, salary rate.
- Incorporating for me also made it simpler to create a wall between my personal finances and my business’ cash flow. This means that down the line, when I merge accounts with my future husband, I will have a simpler view of my business vs. my joint accounts.
After I made the decision to incorporate, I then paid my accountant to file the necessary paperwork and walk me step by step through the process. I believe you can also do this online as well, but I don’t know which method is better.
I will say that paying someone else to do the filing is not cheap, but the peace of mind that it is processed properly and I didn’t need to bash my head against a wall trying to figure out how to do it on my own is priceless. Taxes have always thrown me for a loop and give me nightmares from when I filed on my own in college with the business. So now whenever I have a question about moving my sole-prop bank accounts over to the new incorporated bank accounts, I can just pick up the phone and ask him any questions I have.
And if you don’t have an accountant but want to find one, I suggest reaching out to a fellow self-employed friend and ask them who they use or would recommend. That’s how I found my accountant and it’s been a great fit.