Setting Up Your Business: Deciding On A Sole Proprietorship Or S Corporation When You Work For Yourself
If you run a business and you are the only employee, you may decide to simply set up a sole proprietorship. While this is effective for some business owners, it's also possible to set up an S corporation even when you are working alone. With a sole proprietorship, you use your own social security number for tax purposes. When you create an S corporation, you obtain a federal tax identification number that you use in place of your social security number. Both types of businesses have their advantages, and it's useful to work with a certified public accountant like Carmines Robbins & Company PLC to determine what type of business entity will work best for you.
When You are a Sole Proprietor
When you run a sole proprietorship, your business is not separate from you personally. This means that all profits that come into your business, minus your business losses, will be taxed. You are responsible for paying taxes on all profits of your business, even if you don't take the money as your own personal income. If you save money in an account so that you can grow your business, this is still counted as income. When your business is small and you have limited profits, this model will probably work fine.
Setting Up an S Corporation Instead of a Sole Proprietorship
When you set up your business as an S corporation, you pay taxes on the money that you receive as income from your business, but not on any profits that you don't take as income. Your business is a separate entity from your personal taxes, and it allows you to keep money in your business in an effort to grow our business. For example, if you want to keep $10,000 in profits in the bank to invest in advertising for the upcoming year, you aren't going to pay personal income taxes on the money. Setting up a corporation and receiving a paycheck keeps you separate from your business, and may help protect you from personal liability in the event you get sued.
When you aren't sure what type of business entity is going to work best for you, it's time to sit down with a certified public accountant to discuss your options. There are tax benefits to setting up your business correctly, and an accountant will be able to explain what these tax benefits are. Whether you are a new business, or you are restructuring your current business, an accountant can help you get your business set up correctly.