sole proprietor vs. corp or partnership?

Question

I've been consulting for six months now as a sole proprietor, using a 1099 in the State of California. My gross for the year is trending to $200K (USD). From what I've gathered incorporating could provide significant tax advantages compared to a sole proprietor. Also, understand there are significant tax advantages as partnership. At this point in time I do not have any partners but can find one for paperwork purposes.

- Is there a recommended threshold of gross revenues where one should seriously consider incorporating vs. self proprietor?
- If Incorporating offers the greatest advantage, then which type S or C? Why?
- State and Medicare Tax - eliminated on company profits?
- I understand the part about paying yourself a small salary, however, how do you transfer company profits to self with least exposure from taxes? Dividend?
- What are the taxes on dividend payouts?
- As a corporation can you defer payment on taxes? What about as a partnership?
I do have more questions..

I understand the definitions of each from speaking with folks and researching online. What I am really interested in seeing is the net impact on the financial numbers of doing one vs. another. Does anyone have a simple Excel spreadsheet or calculator or some wizard, to input figures? In the end it's about the numbers.

I'd appreciate referrals to CPAs/Tax Accounts in the San Francisco/Bay Area.

I need insights into how the numbers actually breakdown - under one form vs. the other....

Answer 1

Let's see

C-corp - You own stock in it, but all profits/losses remain with the company. It is responsible for paying state and federal taxes. You could receive income from it in the form of dividends which are taxed at a favorable rate to you, but are not deductible to the company. As long as the company doesn't have any employee it would not pay any payroll taxes.

S-corp - You own stock in it, but profits/losses pass through to the owner(s). The profits that pass through to you could be subject to SE (self-employment) tax, if you are directly involved in the S-corp working for it, and are not getting any kind of a reasonable salary.

With both C- & S-corps liability generally stays with the company rather than the owners, unless the owners personally guarantee things.

Partnership - more than one person involved in the business. Profits/losses are passed through to the owners. Profits are subject to SE tax also, if a partner is involved directly in the business. Downside is that liability flows to major partners in the partnership, and that you have to have all the partners agreeing on things, otherwise the discord could tear the partnership apart.

Sole Proprietorship - Generally reported on Form 1040, Schedule C, E, or F. SE tax to be paid on Schedule C or F profit, but not E. Liability rests solely on the owner. Upside and downside is that the owner is responsible for the success or failure of the business, but also reaps the rewards.

I have included links to wikipedia explaining S-, C-, Partnership, and Sole Proprietorship.

Answer 2

if you form a corp of any kind you have a minimum tax you pay to the state regardless of how much you make, and yes, you will fill entirely different tax returns for that form of business forming a corp actually creates a completely different entity, totally separate from your personal if you operate your business as a sole proprietor you file Sch C and SE on your income and expenses and with your SS# unless you are going to pay employees and then you will need an EIN # and pay, file and report wages and withheld taxes

Answer 3

I could give you my opinion from experience in business, under both, but you really should consult with a CPA or tax accountant.
I would need too much personal info for me to advise anything.
Think very hard before forming a partnership other than a spouse or child.

Answer 4

Best bet is a S corp. You can pass all the profits and losses through to the shareholders without paying corporate taxes.

Answer 5

See this link to compare tax differences.

http://www.legalzoom.com/PDF/Entity_Comparison_Chart.pdf