We receive a lot of applications from merchants for ourservice that have various entity types, such as sole proprietor, corporation, LLC and non-profit. Which one is right for your company? I will explain them all and give my recommendation based on some information from a public accountant. You have three choices, sole, a corporation or an LLC. By default, all businesses are a sole proprietor if they do nothing. Sole proprietor is the easier one to create. All income is transferred to your personal tax return. In short, the IRS do not recognize a distinction between you and the business. There is no personal legal protection if someone were to sue you. If you were to go this route, you simply need to file a DBA with your local courthouse which costs around $10.
A corporation whether it is an S or C, is a separate entity from the owners. If you go with S, the corporation does not pay income taxes. Everything is passed down to the owners. C corp on the other hand does and the owners are treated like employees where income is passed down by salary or pay. The corporation then itself pays income taxes on anything that isn’t paid to the owners or employees. You however have the personal protection if someone were to sue the company, as long as there isn’t any fraud or negligence. There is some cost associated when becoming a corporation. Filing your taxes can be a little ticker. The last entity, LLC is best for most businesses. The cost is very minimum, around $300 for many states. You can also become an LLC in any state no matter where you are located. That way you can benefit from the most favorable state in regards to legal protection. An LLC isn’t a corporation so there is less paperwork, but it is a separate entity so the owners are personally protected. The great news about an LLC is you can file your taxes however you wish. You can file them as a sole, s corporation, etc. When you are an LLC, everything is separate when it comes to filing your taxes. My recommendation is to form an LLC for most businesses. There isn’t much cost to it, fairly easy to do and gives you legal protection. Simply go to the state’s web site that you want to form it at and fill out the paperwork.