LLC vs Sole Proprietorship

What are the benefits of filing for an LLC or corporation as opposed to filing as a sole proprietorship on schedule C?

This is a very interesting question. There are many reasons why a self-employed person should consider forming an entity for conducting their business as opposed to operating as a sole proprietorship and only one reason why they should not!

Reasons for forming and filing as an entity (LLC, C-Corp, and S-Corp.):

  • First and most important reason for forming a taxable entity is for limited liability. If you operate under the umbrella of a taxable entity, you have limited liability and protection from lawsuits. That is the most important of advantages. If you do not operate as a separate taxable entity (LLC, Corp, S-Corp) you always are at risk of personal liability. Sole proprietorships are not “separate taxable entities” in the eyes of law, the sole proprietor will be responsible for damages as result of injury or loss.
  • “Sub-chapter S” election for an LLC or a Corporation. When forming a Florida (many other states as well) entity (LLC or Corporation) Florida law allows for the entity to apply to be taxed by the IRS as a Sub Chapter S Corporation or “small business corporation”. What this means is that the income is passed through to the taxpayer on a form called a K-1 or shareholders share of income (loss) from the taxable entity.
  • 26 U.S. Code § 1361 – S Corporation Statute
  • Under IRS regulations an LLC is taxed as a partnership which means that all income passed through to taxpayers is subject to social security taxes (15.3%). Most states allow LLC’s to request S-Corp status. If the S-corporation election is made than only the income paid to the shareholders in salary is subject to social security tax. Salary to owners must be “reasonable” than all other income is passed though and is not subject to social security tax.
  • If the entity formed is a corporation and the S election is not applied for, than all income is subject to corporation rates as well as being subject to state tax. Since Florida does not have a personal income tax, this can amount to a significant savings of tax.
  • Additionally, if the entity was to remain a C-Corporation, than dividends are subject to be double taxed. Taxed at the corporation level as well as being taxed on the shareholders income tax return.

I know this might sound confusing and that is why a self-employed person should contact a representative at GI Tax for free advice regarding the formation of an entity to operate under. A mistake made in these circumstances could prove very costly. A few minutes today can save a fortune tomorrow.

Come visit the Patriot Bar at GI Tax for free tax advice. (if you are a tax return customer, free advice is available all year long!!! Yes we are here all year long.