Sam had just started his own business, Sam’s Sports Bar, LLC. Since our firm, Gift & Associates, has been doing his taxes for a number of years, he had come to me to help him get started with setting up the business. With all the tax changes coming out of Washington these days, he wanted to be sure that the type of business entity he chose would be best for his situation.
He asked which entity I would choose if I were him. After quickly going over them in my mind, I recommended that his business be taxed as an S corporation. I explained that an S corporation’s main benefits were liability protections against certain creditor situations, no potential double taxation if he would sell his business in the future, and the ability to save some payroll taxes (dependent on the services he provided to his company and what his other employees were paid, among other factors).
A second option would be to do business as a sole proprietor, which would be the easiest way as far as record-keeping goes, but there were some definite drawbacks to this option. First of all, there would be no corporate protection for his personal assets. Also, all of his profits would be subject to self-employment tax (Social Security); with an S corporation set-up, it was possible that some of the money he would take out of the business would be considered distributions, which would not be taxable for self-employment. There were too many potential drawbacks with this option to suit me.
If he brought in his wife, Cathy, or possibly a friend of his, maybe Mark, to form a partnership to own the business, the same disadvantages as a sole proprietorship would still exist, since a partnership for tax purposes is basically a collection of individuals. Most of the same tax benefits and drawbacks apply in either situation.
The other option was a C corporation. They used to be popular back in the 1980’s, but a change in the law made it probable that upon the sale of a business, there would be double taxation (once at the corporate level and once at the personal level). This major change dried up the market for new C corporations.
I could see that Sam was satisfied that my original answer of being an S corporation was the best option for him. He contacted the attorney to take care of filing the necessary paperwork to make this happen.
Within a short matter of time, all the paperwork was done and Sam’s Sport Bar, LLC was up and running as an S corporation and Sam was relieved that at least this aspect of starting his business was handled correctly.
To be continued…
