Once you have made up your mind to create that new business, it's time to think about which option is right for you.
In most cases you want to limit the personal liability of the owner or owners.
Generally cases you have two choices: A corporation or a Limited Liability Company (LLC).
Each situation is different, but there are certain things that you should keep in mind when choosing between the two options.
The Limited Liability Company The Limited Liability Company option may make better sense because of its simplicity and flexibility.
That's because a C corporation is subject to double taxation.
This is not the case with the Limited Liability Company.
The actual LLC does not pay tax on its income, unlike the corporation.
The C Corporation Corporations have their own advantages; these include but are not limited to: A configuration that may be more alluring to investors.
Even if you have just one or two investors that work with you on a daily basis then they will be able to see where their money is invested.
But what if you don't work with the investor directly? What could you (the business owner) offer in order to make things run more smoothly? In these situations, a corporation enables you to issue corporate stock certificates that an investor would consider tangible proof for the partial ownership of the business.
Also, as the owner (shareholder) and employee, the corporation can hire you as its CEO, pay you a salary that can be deducted from taxes.
You also get some fringe benefits such as covering your health insurance premium.
A Limited Liability Company would allow you to deduct only a portion of those fringe benefits.
From a taxation point of view, any benefits provided to the members of an LLC don't get the same favorable treatment as in a Corporation.
Sub Chapter S Corporation Sometimes a sub-chapter S corporation can make better sense for the business owner worried about self employed taxes.
These are the taxes that are withheld from employees' paychecks.
This tax doesn't apply only if you work for someone else, but also if you are self employed.
We're talking here about the 15.
3% that gets collected on incomes up to $94,200 and 2.
9% on earnings that go above this plateau.
S Corporations pay the self employment tax on the money earned.
However, you don't pay it on profits that come to you as a shareholder.
In most cases you want to limit the personal liability of the owner or owners.
Generally cases you have two choices: A corporation or a Limited Liability Company (LLC).
Each situation is different, but there are certain things that you should keep in mind when choosing between the two options.
The Limited Liability Company The Limited Liability Company option may make better sense because of its simplicity and flexibility.
That's because a C corporation is subject to double taxation.
This is not the case with the Limited Liability Company.
The actual LLC does not pay tax on its income, unlike the corporation.
The C Corporation Corporations have their own advantages; these include but are not limited to: A configuration that may be more alluring to investors.
Even if you have just one or two investors that work with you on a daily basis then they will be able to see where their money is invested.
But what if you don't work with the investor directly? What could you (the business owner) offer in order to make things run more smoothly? In these situations, a corporation enables you to issue corporate stock certificates that an investor would consider tangible proof for the partial ownership of the business.
Also, as the owner (shareholder) and employee, the corporation can hire you as its CEO, pay you a salary that can be deducted from taxes.
You also get some fringe benefits such as covering your health insurance premium.
A Limited Liability Company would allow you to deduct only a portion of those fringe benefits.
From a taxation point of view, any benefits provided to the members of an LLC don't get the same favorable treatment as in a Corporation.
Sub Chapter S Corporation Sometimes a sub-chapter S corporation can make better sense for the business owner worried about self employed taxes.
These are the taxes that are withheld from employees' paychecks.
This tax doesn't apply only if you work for someone else, but also if you are self employed.
We're talking here about the 15.
3% that gets collected on incomes up to $94,200 and 2.
9% on earnings that go above this plateau.
S Corporations pay the self employment tax on the money earned.
However, you don't pay it on profits that come to you as a shareholder.
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