When contemplating the idea to become a self-employed individual, there are many things to consider. One of the items you must take into consideration is the type of business entity you are going to operate. This is particularly important as the type of entity you choose can impact: how you file taxes at the end of the year,  how you report your income, and  your level of asset protection. It is also important for you to take into consideration your level of growth when choosing which entity is best for you.
How do you choose which business entity is right for you? Below we have provided you with a few things to consider.
When you start a business without making an entity election, you are known as a sole proprietor. A sole proprietorship does not provide an individual with any sort of liability protection. As a sole proprietor you will be responsible for filing an individual return with a profit and loss statement, better known as a Schedule-C. Sole proprietors will be taxed based on the net profit of the business.
Another option is setting up a Limited Liability Company, better known as an LLC. An LLC provides a level of separation between the owner(s) and their company. Some other key benefits of an LLC are:  they are simple and inexpensive to setup/maintain,  they are noted as disregarded entities when it comes to tax purposes,  they allow you to establish a business bank account to help separate your business funds/assets from your personal funds/assets, and  they avoid double-taxation of profits. Just like with a sole proprietorship, business income on an LLC is shown at the end of the year on a Schedule-C and is filed as a part of your individual return.
Limited Liability Companies can be set-up as either a single-member LLC or as a multi-member LLC. A multi-member LLC is often set-up for those looking to engage in a partnership. Those partnerships operating under a multi-member LLC receive the same limited-liability protection. Additionally, there are some advantages of partnerships. For example, partnerships are not only easy to establish, but they also combine the skills and financial abilities of several people. Regardless of how long the partnership runs under the multi-member LLC, the partners will be required to file a partnership tax return before filing their individual tax returns each year. Partners are required to show the allocation of income, which is reported on the partnership return. Once the partnership return has been completed, each partner will receive a Form K-1, which will then be used when filing the individual tax return.
You can also elect to run a Limited Liability Company as an S-Corporation. An S-Corporation continues to provide limited liability protection and avoid double taxation of profits. An employee shareholder of an S-Corporation must receive a reasonable wage for services rendered. Any wages paid are subject to self-employment tax, but anything above and beyond wages paid is not subject to self-employment tax. Individuals interested in an S-Corporation must also consider other costs associated such as posting payroll taxes, creating tax documents, and an additional S-Corp tax return that needs to be filed each year.
We hope that you find this article helpful in choosing the right business entity for yourself. If you or someone you know needs help with considering business entities when becoming self-employed, please contact Abacus CPAs by calling 417-823-7171.