Sole proprietorship vs. LLC Tax question (NJ)?

If you are talking about taking a sole proprietorship and turning it into a single member LLC, then the taxing of the two are identical. Both are reported on Schedule C of the owner's tax return.

If it is a multiple member LLC, then it will be reported on a partnership return (1065) and flow through to the members on a Form K-1. Even in this instance the tax implications would be the same. The income is still subject to income tax as well as self employement taxes.

Hope that helps.

Llc Vs Sole Proprietorship

Sole Proprietorship Vs Llc

You'll pay about the same taxes. However, the record keeping and administration of a corporate entity is usually much easier (although sometimes more complicated) than as a sole proprietorship.

If you have an LLC, the LLC will need to pay you a salary, pay payroll taxes, etc. The downside is that you will have to do payroll reports, etc. at least once a month, usually every 2 weeks. If you have make sure there is enough money in the bank to pay the payroll taxes as they become due - you will be required to make certain tax deposits for this. Also, you need to pay unemployment insurance on the employees, which isn't that much but still another expense. The upside is that you just get a regular salary, so for your personal income tax return it is pretty simple - since the LLC already deducted your estimated taxes and FICA, you won't have to worry about paying all of that plus FICA and self-employment tax all at once at the end of the year. In addition, it's much easier to prove that certain business expenses are deductible if the LLC is paying it, versus if you personally are paying it. In addition, having a corporate entity will give you some measure of protection in case of liability.

I see my old Buddy, Jeff, has again given part of an answer: A multi-member LLC can elect to be taxed as a Partnership OR as an S-Corp on a Form 1120-S. Electing to report on an 1120-S can give you some advantages over reporting on a 1065 (Partnership return). Under the assumption that you will be a single member LLC, that really has no relevance but I can't pass up a jab at the CPA. I would suggest that you look at setting up a closely held corporation for the best tax advantages. And, Wendy, if you and your husband are the only members of your LLC, there is a strong possibility that you will still be considered a "Disregarded Entity" by the IRS and not be able to get those Corporate tax advantages you mentioned. Better talk to someone other than who you have so far.

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RE:

Sole proprietorship vs. LLC Tax question (NJ)?

I am trying to determine the tax implication of one vs. the other. At the end of the day, will a person pay more, less, the same? The nature of the business is Sales- fees are charged for services rendered. Average fee=10,000...maybe once a month. 1/4 taxes are currently paid.

Thanks.

My husband and I just took our sole proprietorship and changed it over to an LLC. We did this for two reasons

1) An LLC gets the same tax breaks as a corporation

2) An LLC protects any assets not belonging under the business name (house, personal car...etc)

This should answer you question:

Running Your Business The Right Way!

LLC Tax Advantages

The essential advantage of a limited liability company is that it provides pass-through treatment without taxation at the entity level, essentially partnership tax treatment, while shielding members from personal liability. Multiple member LLC's are treated as a partnership and file a US Partnership Tax Return Form 1065. Single Member LLC's can be treated as a Sole Proprietorship and are taxed on the member's 1040 Schedule C. Limited liability companies then provide the advantage of protecting its members from the liabilities of debts and obligations, similar to corporate shareholders. It should be noted, however, that this limited liability has been continuously eaten away, particularly in the area of environmental law, and it is not expected that limited liability companies would fare any better. If a limited liability company is properly structured, it will be treated as a partnership pass-through entity.

General Tax Classifications

Because a limited liability company is an unincorporated business entity, the Internal Revenue Service will not treat it as a corporation unless it has more corporate characteristics than non-corporate characteristics. The Entity Classification Election filed with the IRS can specify whether the LLC will be treated as a Corporation, Partnership or Proprietorship. Because these fundamental rules have been established over a long period of time where taxpayers tried to classify entities as corporations, and the Internal Revenue Service tried to compel pass-through entity, the regulations favor pass-through status. Treasury Reg. § 301.7701-2 lists the following six characteristics in determining whether a business is subject to corporate taxation:

(1) Associates

(2) An objective to carry on business and divide the profits

(3) Limited liability

(4) Continuity of life

(5) Free transferability of interest

(6) Centralized management

Sole Proprietorships are Easy to Set-up

Sole Proprietorships are the easiest form of business to start and in many respects the easiest form of business to stop. Since more than 90% of the businesses established in a given year will be out of business within 5 years, low cost of start-up and simplicity of operation are a significant advantage of the sole proprietorship.

Disadvantages of Sole Proprietorships

Sole proprietorships have two main problems. First, all liability of the company, including all of the employment taxes if not paid, are the personal responsibility of the sole proprietor. Secondly, expansion of the business with additional equity holders is difficult because it requires at a minimum a change of form from a sole proprietorship to a partnership or a conversion to a corporation or a Limited Liability Company. The other disadvantage is that a sole proprietorship will need to do the necessary things to establish the business which are not much different nor less expensive than a Single Member Limited Liability Company.

The Sole Proprietorship form of business is appropriate for many if not most businesses.

1. Personal Liability. There is a natural concern about the "unlimited liability" aspect of the Sole Proprietorship. In some circumstances, liability is not an issue because it is adequately covered by insurance and malpractice insurance. If the appropriate coverage is not available, limiting the risks by having a Single Member LLC or corporation would be most advisable.

2. Personal Liability for Debts. The sole proprietor has personal liability for all the debts and obligations of the business. This puts personal assets at risk if something goes wrong with the business, and no insurance coverage is available.

3. Personal Liability for Employment Taxes. The sole proprietor is personally liable for both the employee's portion (trust fund) and employer's portion of employment taxes. A corporation or Limited Liability Company would also be liable for both the employer and employee. Nevertheless, if a corporation or Limited Liability Company were to go out of business owing employment taxes, the responsible parties (members, shareholders, officers) would be liable only for the trust fund portion and not the employer's portion.

4. Limited Existence. When the sole proprietor dies, the sole proprietorship goes out of business and may be difficult to continue as a viable entity.

5. Sale/Transfer of All or Part of the Business. The sole proprietor can transfer the business only by the sale of business assets. This means it is more difficult to have someone buy into the business, and there are potential tax consequences of converting a sole proprietorship to a corporation or a Limited Liability Company rather than starting out with a durable form of business entity.

6. Taxation. Taxation of the sole proprietorship is reported on Schedule C of the U.S. 1040.

7. Cost of Operation. The cost of operating a sole proprietorship versus a Single Member Limited Liability Company is about the same for accounting and business operating purposes. There is no advantage to the sole proprietorship.

8. Advantages. The sole proprietorship is easy to form and easy to end. Nevertheless, taking in potential equity holders/partners, or getting investors is legally difficult. Unless the business is a professional practice or other small service business, it is probably advisable to have a durable entity such as a Limited Liability Company or corporation.

I chose an LLC biz for the tax benefits

Jeff is right. A single member LLC goes on Schedule C as does a "sole proprietorship".

The same taxes. But there are other legal advantages for having an LLC. What about lawsuits? An LLC could protect your nonbusiness assets.