From a tax standpoint, should I choose an LLC or Sole Proprietorship for the following business?

Question

I'm looking to start a computer service business in South Carolina, and I'm on the fence between choosing an LLC vs. a Sole Proprietorship. What would be best from a tax standpoint?

I’ll initially be working for myself but might eventually hire employees.

This business will be my only source of income, and the main expenses will be advertising (~$2,000 - $10,000) and software purchases ($1,000). The business should bring in about $50k gross the first year.

I will initially be working with home computer owners, although I would like to expand to service other businesses once the company has gained a reputation.

If I’m leaving out important details, please ask and I’ll add them.

Thanks!

Answer 1

From a tax standpoint, it doesn't matter 2 cents. An LLC is a disregarded entity. You'd file the same return either way and your tax bill would be the same.

An LLC helps protect your personal assets from liabilities of the business, that's all. Unless you're in a risky business and likely to be sued, a good general liability insurance policy will be cheaper than the costs associated with establishing and maintaining an LLC.

You do NOT need to be organized as an LLC to get an EIN. You will need an EIN if you have employees but can get one as a Sole Proprietor. (And you can get one to use in lieu of your SSN even if you have no employees.)

Answer 2

@firewater "or a LLC (also a corp)" I am sorry, but you are wrong. An LLC is a Limited Liability COMPANY, NOT a Corporation. It is a legal entity, but only Corporations (xxx, Corp. or xxx, Inc.) are corporations. They file an 1120 unless it has elected to be treated as a sub-S Corporation. This is a formal procedure that requires filing a form with the IRS. "Also I hear it's very tax heavy compared to sole Proprietorship. Is this true" An LLC is a disregarded entity which means the IRS and most states don't recognize it. Therefore the LLC has to elect (decide) how it wants to be treated for tax purposes. Many single member LLCs choose to file as a sole proprietorship. But there are usually annual filing fees the LLC has to pay regardless of the tax treatment. In MA, for example, the LLC has to file annually with the Secretary of State's office; that's $500. AND if the LLC chooses to file as a corporation (regular or sub-S) the DOR expects the required $456 minimum "income" tax imposed on corporations. " I will have ownership of my name " ONLY in the state you register the LLC. Each state regulates business entities (LLCs, corporations, and partnerships) so you could have 50 different Joe's LLC and there would be nothing you could do about it. The only way you can secure your business name is through trademarking. And even that doesn't guarantee some big national corporation won't sue you because they decided they wanted to use it, too.

Answer 3

Go to www.IRS.gov you will find a lot of answers there. But a LLC would be the best choose because if there would be a problem and someone would sue you thy would only get money from the business if thy would win. If you are a Sole Proprietorship you could losse all that you owen and the business too. The LLC puts a cover over your personal assets that you own and you can not be sued personally only the business can. I hope this helps. Mell

Answer 4

An S-Corp and and a sole proprietorship are similar from a tax standpoint. A C-Corp is not.

Any LLC is much better than a sole proprietorship for reasons having nothing to do with taxes. If someone sues an LLC, all they can get is what the LLC has; they do not get any of your other property. If you have a sole proprietorship, they are suing you, and you can lose everything.

Answer 5

From a tax point an LLC doesn't exist. If you don't set it up to be either a C-corp or S-corp you'd be treated for tax purposes as a sole proprietorship, with reporting income and expenses on a Schedule C for your 1040 tax return.

And for state purposes an LLC can be expensive. Massachusetts has an annual $500 fee that an LLC is required to pay.

Answer 6

I thought about the same subject... 4 years ago...

LLC or Sole Proprietorship from tax standpoint?

It's interesting question because... it all depends on what this business will be in about 10 years from now.

We can all dream and believe "in future I'll be a billionaire"
... yet it can only be true if we actually DO THIS or ACHIEVE IT.

And I'm not going to say why I would prefer LLC or Sole Proprietorship or any other form of business... because I believe it all starts from What is THE VISION of your business... and once you know your vision...

all you have to do is get one of those tax attorneys who you'll tell your vision and he/she will work the plan for this.

Answer 7

As a bookkeeper in upstate SC I would recommend going with an LLC. just one reason is after you apply for an ein you will not have to give out you personal SSN for resale tax purposes and you never know what your future will hold - you may end up having to hire an employee. Any other questions please email me.

Answer 8

check with local IRS office, you can be a LLC and Sole
Propietor.