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Differences in Filing as an LLC, Partnership, S Corp, Sole Proprietorship and Independent Contractor

Posted by Paul D. Woodard | Mar 20, 2017 | 0 Comments

Making the leap to go into business for yourself can be a difficult decision. However, once you make that decision, the next difficult question to answer is how your business should be formed. Many businesses have the option to file as an LLC, partnership, S Corp, or sole proprietorship. The right decision can save you money and most importantly reduce the risk of personal liability.

The formation of your business can impact the way you file taxes, how your income is taxed, required corporate formalities, options for raising capital, and whether your personal property can be seized to satisfy company debts. The decision to choose one form over another can be complex and will depend on a number of factors, but we will go over some general rules.

A sole proprietorship is one of the simplest business forms, and for this reason, is a popular option for individuals making the transition to working on their own. A sole proprietorship is set up to allow an individual to own and operate a business. As a sole proprietor, the business is not its own legal entity, even if it is operating under a fictitious name. These are simple to set up, have no corporate formalities, and tax filing is done through the business owner's personal income taxes. However, if the business incurs debts or other liabilities, creditors can go after the sole proprietor's personal assets.

Except for spouses doing business together in limited situations, a sole proprietorship is generally limited to ownership by one individual. Business partners who want to go into business together must choose another option for their business. A general partnership may be the next simplest option. Two or more business owners engaged in a business for profit can form a general partnership, which may be treated as a flow-through entity for tax purposes. This avoids double taxation; however, the owners may not have the benefits of limited liability. As such, the owners may be personally liable for business debts. Additionally, a general partner's liability is not limited to that partner's percentage interest in the partnership, but extends to his or her own personal assets as well.

With the benefits of limited personal liability, many companies chose to form as an S Corp or LLC. Like an S Corporation, a limited liability company (LLC) protects the personal assets of owners from business debts and liabilities, as long as the owners maintain separation and certain formalities. S Corps and LLCs are generally treated as pass-through tax entities, with profits and losses reported on individual tax returns. One area where S Corps and LLCs differ is how owners are treated. S Corp owners are generally considered employees where an LLC owner is not an employee.

With the benefits of limited personal liability, many companies chose to form as an S Corp or LLC. An S Corporation is regular business corporation that has made an election to be taxed under Subchapter S of the Internal Revenue Code and, therefore, is treated as a partnership for most tax purposes. Like an S Corporation, a limited liability company (LLC) protects the personal assets of owners from business debts and liabilities, as long as the owners maintain separation and certain corporate formalities. S Corps and LLCs are generally treated as pass-through tax entities, with profits and losses reported on the individual's tax returns. One area where S Corps and LLCs differ is how owners are treated. S Corp owners are generally considered employees where an LLC owner is not an employee

Talk to your San Diego business attorneys with any questions about how you may want to form your new company. If you have any questions about business planning, corporate filings, or general business counseling, the San Diego law firm of Butterfield Schechter LLP is here to help. We will answer all your questions and make sure your business plan will set you up for success, reduce tax liability, and protect your personal assets. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Paul D. Woodard

Paul Woodard practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Estate Planning.

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