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