Ask an Accountant

Although tax season is over, tax questions arise year round. Mr. Mom on Dealz is an experienced accountant and will be answering questions sent to me at [email protected]
I have received A LOT of questions lately about setting up a business. I wrote a post HERE about deciding on what entity to be. My husband (the accountant) has created a graph below that may make things more understandable.
There are several choices for set up…however, depending on the structure of the business, the liability protection, and the money you are going to be taking out of the business as compensation will determine the best way to organize. I have omitted the Partnership Entity simply because this MUST be made up of 2 or more individuals and is a hybrid form of LLC & S-Corp (pays Self Employment tax, can have W-2 wages, limited distributions, files a Form 1065 that flows through to personal return. See chart below:
Structure Cost to set-up/maintain Liability Protection Ease of Getting out $$$
Sole Proprietor (Sch C) Low, files Sch C on your 1040. Pays self-employment tax None No W-2 for owner/can take unlimited distributions
LLC Medium files Sch C on your 1040. Pays Self-Employment tax Limited Personal protection No W-2 for Owner/can take unlimited distributions
Incorporated (C-Corp) High, files its own 1120 tax return, pays its own tax at higher corporate tax rates Excellent personal protection Compensation on W-2, can take dividends (these are taxed)
Incorporated (S-Corp) High, files its own tax return, pays no tax at corporate level, profit “flows through” to personal tax return Excellent personal protection Compensation on W-2, can take non-taxable distributions, but is limited to “basis” in the business.

This chart is not all-inclusive, but is a good start for you to make a determination as to what you think you may want to do.
*Please keep in mind this post is for informational purposes only and answers given are very general. Many things depend on individual circumstances. Please contact your personal accountant or financial advisor for your particular situation.

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About the author: I’m a 30-something mom to three, brand ambassador. content creator, social media maven, blogger extraordinaire, earth lover, butcher, baker, candlestick maker (or something along those lines) – love word games, crafting, cake decorating or shooting pictures.

2 comments… add one
  • One of the best professions to have in the family -- an accountant! Thanks for the info. Not that I will need this any time soon, but good to know for the future. At one time I worked on my own and wish I had consulted an accountant b/c I ended up owing lots of taxes so I wish I had set up beforehand. Thanks.

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