You’ve finally decided to take the leap and open your small business in Burbank, but you’re not sure where to begin. Should you become a sole proprietorship, an LLC or an S-corporation? Let’s take a look at the differences to help you determine what’s right for you and your business.
Going It Alone: The Sole Proprietorship
If you’re starting out very small—you’re the owner as well as the salesperson, marketing manager, bookkeeper and office manager—then a sole proprietorship may be right for your small business.
As a sole proprietor, you will use your social security number as the tax identification number for your business. However, even though you are using your social security number, you will still need to obtain a business tax certificate from the city of Burbank or whichever California city you are doing business in. If you are selling products, you will also need to get a seller’s permit for the state of California. Your business name will automatically be your first and last name, but if you want to call it something else, you will need to file a fictitious business name, also referred to as a DBA (doing business as).
In terms of taxes, you do not have to file a separate tax return for your small business. Both the IRS and the state of California require that you report your business income and expenses on your personal tax return using schedule C.
How an LLC Is Different than a Sole Proprietorship
If you’ve decided to make it more official and open a limited liability company (LLC) in Burbank, you may be surprised to learn that an LLC is not treated much differently from a sole proprietorship.
In addition to getting a business tax certificate and possibly a seller’s permit, you will have to file Articles of Incorporation and a Statement of Information. Then, instead of using your social security number for the business, you will receive an employer identification number, or EIN.
The biggest advantage of starting an LLC is that, unlike a sole proprietorship, any liability will fall on the business and not on you personally. In other words, if your business gets sued, your personal assets may be protected.
Your taxes, however, will be treated exactly like a sole proprietorship: You will report any income and expenses on your personal return using schedule C. There is no tax benefit to owning an LLC in Burbank. In fact, one of the biggest differences between an LLC and a sole proprietorship in California is the annual $800 tax that you must pay as an LLC, regardless of making a profit that year or not.
**Please note that this information is referring to a single member LLC. Partnerships are treated in a different manner.
So, Should You Create an S-Corporation Instead?
The answer to whether you should incorporate or not depends on your business needs and income.
Like an LLC, you must file Articles of Incorporation and a Statement of Information, and will receive an EIN. An S-corporation is also considered a separate entity from you personally and protects you from liability.
However, S-corporations are treated differently when it comes to taxes. The income and expenses will have to be reported on a business tax return for your company. The profits (after expenses are taken) from the company will then pass through to your personal income and be taxed at your personal rate.
With an S-corporation, you will also have to deal with paying employees, even if you’re the only employee, and file monthly and/or quarterly payroll taxes.
There isn’t always an easy answer when it comes to starting a small business in Burbank or beyond. Moore & Paquette Tax Group can help you answer those questions and get your small business up and running.
Please note that tax laws change often, and we recommend that you to reach out to one of our tax preparers for the most up-to-date information.