What should I choose between S-Corp vs. Sole Pro.?

Question

I am planning to start up a small carpet cleaning company in PA that annually grosses about $30,000 working all by myself. But later in about a year or so, I might want to grow it as a full janitorial service company with several employees that generates more than $150,000 which I have done in Chicago last year. When I was doing business in Chicago, I paid a lot of payroll and income taxes with S-Corp status. So, now I want this carpet cleaning business to have minimum tax expenses. Should I go ahead and file S-corp or just do Sole Pro.? Which of the two will be more beneficial tax wise when earning around $30,000 a year? (If I go S-Corp, I am planning to pay myself about $500 a month as a salary from that $30,000)

Answer 1

Normally the only advantage to forming a corp of any type is to shield your personal assets from liability claims against the business.

Normally you'll pay higher total taxes and fees with a corporation than as a sole proprietor. Payroll taxes will be levied on 100% of any salary you pay yourself, plus Federal and State unemployment taxes. The portion of the profit that passes through to your individual tax return will attract Social Security and Medicare taxes on 92.35% of the net profit instead of 100% of the wages paid so there's no advantage to paying yourself a salary.

Although the Federal government treats an S-Corp as a pass-through entity, most states treat an S-Corp as any other corporation. This normally results in higher state taxes since you pay tax on the first dollar of profit within the corporation; there are no standard deductions or personal exemptions to reduce your tax bite. Additionally many states levy a minimum excise tax on all corporations regardless of the corp's earnings. Then there are state-mandated reporting requirements to contend with as well, many of which attract filing fees on top of the income tax levy.

The payroll taxes on your employees are a wash either way; you'll pay the same as a corp or sole proprietor.

Unless you are involved in a risky business the protection afforded by a corp are not worth the extra costs involved. A good general liability insurance policy will provide better protection and will often cost you less in the long run.

Lastly you'll probably pay higher costs for accounting support and tax return preparation with any corp. There are 2 additional tax returns to prepare -- State and Federal for the corp on top of your personal returns -- and that costs money unless you're able to do it yourself. With the complexities of corp returns and reporting requirements it's usually unwise to proceed without professional assistance at least on a consultative basis.

Note to Jim C: While an LLC is a disregarded entity for FEDERAL tax purposes, most states treat an LLC as a corp with all of the hassles and costs of corp return filings and reporting requirements.

Answer 2

Neither. File as an LLC (limited liability corporation) instead. It provides the benefits of being a full fledged corporation, with a tax rate of a sole proprietorship.