December 15, 2015

Establishing Separate Entities for a Sole Proprietor

Establishing Separate Entities for a Sole Proprietor: The Advantages and Disadvantages

Setting up a separate entity for a sole proprietor (i.e. LLC or S-Corp) can have its advantages and disadvantages. Here are some things to think about if you’re considering this for your business.

Advantages:
• Incorporating or forming an LLC can help protect your personal assets and finances in the possibility of being sued from a buyer or seller. You are also allowed to take certain fringe benefits if hiring employees in the future.
• Lower IRS audit risk
• For an S Corp, the income to the entity is not subject to self-employment tax. But, a salary must be taken – payroll tax is still paid to the IRS; the S Corp would get a deduction for the employee portion of payroll taxes
• It helps you stay organized and clearly separates your business from your personal affairs
• Having a separate business entity may give your work greater credibility

Disadvantages:
• Incorporating or forming an LLC requires additional paperwork and payments to file that paperwork.
• There are also additional filing requirements at the Federal and State level.
• There are additional costs to maintain entities.
• You are not allowed to take mileage expenses as a deduction; actual cost is only allowed for a business. You also need to capitalize the cost of the vehicle.

A few facts about required filings:
• A sole owner of an LLC will file the income and deductions on Schedule C
• An LLC with partners files a 1065
• An S Corp will file Form 1120S

Please contact Maddox Thomson & Associates to discuss this in greater detail. We can help you get set up with the structure that is best for you.

-Maddox Thomson & Associates Team

Maddox, Thomson & Associates

Maddox, Thomson & Associates

MTA is a full service, privately held CPA firm established in 1985 in Houston, Texas. Built on a reputation for client service, the firm delivers tax-compliant solutions through its financial planning, tax preparation and consulting services.

With more than 30 years of experience, our team of seasoned professionals will help you define personal and professional financial goals and establish strategies to maximize achievement.
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