small business questions and answers
2011
Which is better for a person who wants to start a small business, a sole proprietor or a partnership?
My son is married with no children. He wants to start a small business and wants to know the answer to this question.
We want to know which is better for him to be the sole proprietor or have a partnership for the business?
He wants to know this for the purposes of doing his taxes,
legal matters and etc. etc. Thank you for the answers.
Dear Psycho
The question depends on a number of factors.
A sole proprietorship (dba) has the least amount of expense and headaches to setup and operate, but the also the least amount of liability protection. If you go bankrupt as a SP you must declare personal bankruptcy. Income and losses are taxed to you personally and also completely subject to Self Employment tax of 15%.
An LLC offers liability protection and is an organization that is more difficult to set up and operate than an SP but less than a Corporation. Income is taxed on your personal tax return as a “pass through”. These taxes may be higher if you have income right away, but if you have losses they are deductible against ordinary income on your tax return. SET is due on your salary, but not necessarily on company profits.
An S- corporation has the same tax status as an LLC but is more complicated to setup and operate. If offers liability protections.
A C-Corp is the most complicated to setup and operate, but income is taxed at the corporate rates which can be less than the personal rates. If you sell assets from a C -Corp and then want the money for yourself, it will be taxed twice – once in the corp and once personally. But if you sell the entire business, you get the lowest possible tax rate, capital gains tax, currently 15%.
In short if you will have early losses and need liability protection do an LLC. If you will have a substantial business with lots of profits especially early on, do a regular C Corp.
Good Luck,
Dana B – President
www.thebarfieldgroup.com
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