Starting a new small business, it best to incorporate (S-Corp) or create an LLC?

Question

Just received this email from my good friend. Wanted to hear some feedback from any tax specialists.

"So here's my questions in a nutshell.  We are starting a small clothing business.  We will be selling online mostly in the beginning.  We are starting small but hope to get bigger one day.  We are investing personal money up front, and hope to find an investor once we start up.  We need to figure out right now whether we should incorporate (become s-corporation) or become an LLC.  I have done numerous hours of research understand the legality of both mostly.  I am just not sure about the taxation which will be better for us.  Again we will be selling retail, I cant really forecast how much we will be selling but i obviously hope once we start small we can expand.  Can u ask around for tax purposes which would be better for us?  3 partners equal split of company.  I was told by a lawyer to talk to CPA for tax purposes. Again selling retail online for now starting small but with hopes to expand, 3 partners."

Josh · Accepted Answer

Hello,

My first piece of advice was going to be to consult a lawyer, but it appears that you have done that, which is great.  I have an LLC with 2 partners (myself included) which holds real estate and it works out great.  I do this so I can limit my personal liability on the rental properties I own.  Doing this for a clothing company would be no different (even with a 3rd member).  I have a feeling your CPA, and maybe your lawyer, both have or will tell you that an LLC is a much more simple entity to maintain and provides you with the same pass-through tax status of a partnership.  It is easy to set up and there are no hoops to jump through to achieve the partnership tax status like an S-Corp has.  You just tell the government to tax you as a partnership and that is what they do.  Definately go LLC.

jenelle · Answer

You do not want any of the above, easily start off as a sole proprietor, it can be low-priced and effortless. The only actual abilities to a LLC or becoming a Corp.Is legal responsibility security which it does now not sound to me such as you need to much to worry about right now. That you could continually do it later whilst you begin to grow.I've owned and operated my own businesses for 35 years, keep it quite simply. Hiring employees has nothing to do with LLC's or businesses. Conveniently observe for a industry license at the metropolis corridor you do industry in, most of the time rate beneath $75 and open your own industry checking account, order checks that you may pay workers with, the financial institution will support you.

Wayne Z · Answer

Operating an S-Corp is much more complicated as it is considered a separate legal entity from its owners.

My advice is to walk before you run.  Start with an LLC.  You can change to an S-Corp if you want to later down the line.

Kishore · Answer

Hello Melissa,

Good to know that your friend is starting a new business. In my recent blog I have discussed the six business structures available and their pros and cons.

You can have a look at them here --> http://consultk1.com/6-business-structures/

Feel free to message me in case you require anything specific, feel free to message me.

Cheers!
Kishore

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Starting a new small business, it best to incorporate (S-Corp) or create an LLC?

4 Answers