Starting your own business can be terrifying for so many reasons. Leaving out all of the “I need to sell a good or a service and profit and be the boss?” part of the deal, there are a ton of legal aspects as well. The big one that most people worry about is how to register your business with the government, but business law encompasses hiring/firing employees, intellectual property, anti-trust laws, paying taxes, and finally(but hopefully not relevant for you!) dealing with bankruptcy. At Post Falls Law, we’ve got extensive experience in business law; almost 1 in 5 of our entire caseload is business related. For more in-depth knowledge, you’ll definitely want to give us a call. While this article will be informative, it should just be the starting point of your profitable business journey.
We may as well start at the beginning; registering your business! The common choice for a new business owner is whether to register as anS corp(sub-section S corp) or an LLC (Limited Liability Company). They have a lot of similarities, and a few important differences.
SIMILARITIES BETWEEN AN S-CORP AND AN LLC:
-Limited Liability: LLC may have it in the name when S Corp doesn’t, but both models do offer you some protection as an individual. You can’t be financially responsible for more than you’ve invested in the company. If you’ve only invested $17,000 into the company, that’s all you would owe to your LLC’s creditors, regardless of the LLC’s debt.
-Pass-through taxation: For both entities, you won’t be paying a business income tax. Instead, the loss or profit you experience in a year will be paid as an individual. The exception here is if your LLC has more than one owner.
DIFFERENCES BETWEEN THE TWO
-Taxation: How each entity is taxed is the primary difference between the two. Because of the above pass-through taxation model, you’re taxed as an individual for both types of company. However, what you actually pay the taxes on is slightly different. A one-person LLC will simply pay taxes on the net profit minus deductibles. Business made $100,000? You’re paying on it. No payroll taxes here, because you don’t really have employees. As an S Corp, you are an employee of the corporation, even if you’re the only member. You pay yourself a reasonable salary and can take dividends out of profits. You do pay payroll taxes on your own pay, meaning unemployment etc. While this sounds like a purely negative side, it also means you’re entitled to unemployment if things go south, because you’ve been paying the taxes on it. LLCs also have quarterly taxes they pay to the IRS instead of the payroll tax on yourself. Keeping track of that can be pretty annoying.
-Ownership: LLCs can have any number of shareholders, S corps are limited to 75.
-Price: It costs more to start an S corp. Usually, lawyers and official paperwork are both required. Luckily for you, PF Law lessens the load here! We know what we’re doing and are locally here for you. We make it pretty easy to reap the benefits of being an S corp. LLCs only cost a few hundred bucks and can be done by yourself without too much legal experience.
Hopefully, we’ve helped with the first hard decision ahead of you! There will be follow-up articles to this one to cover the other legal aspects of owning a business. Post Falls seems to be a small business hotspot right now and we’d love to do our part to help that happen. Whether you’re looking for a location or looking for a legal help, we’ve got you covered! Until next time, entrepreneurs.