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Thinking of starting a business?

Is 2024 your year to start a new business? Or maybe you’re restructuring your business to better fit your tax and capital needs. In any case, this short test will see if you’re ready to choose the best structure for your business.

Difficulty Starting a LLC

Answer: B

“False”

Filing a LLC is relatively easy. Each state has slightly different filing requirements, but for the most part starting a LLC is a smooth process that does not require hiring another person or service.

Major benefit of a S-Corp versus a LLC

Answer: C

“Ability to avoid self-employment taxes on a portion of business income”

The key benefit of a S-Corp over a LLC is the ability for S-Corp owners to pay themselves a salary, which is subject to payroll taxes, while the remaining business profits are not subject to self-employment taxes. This can result in significant tax savings compared to a LLC where the owner's entire business income is subject to self-employment taxes.

Which business structure should you choose?

Answer: A

“S-Corp”

Here's why an S-corp is the best choice given the criteria provided:

1. Shareholder Limit: S-corps are limited to 100 or fewer shareholders, which fits the criteria of "less than 100 shareholders". C-corps and LLCs do not have this shareholder limit.

2. Raising Capital: S-corps can raise capital by selling ownership stakes, just like C-corps. LLCs can also raise capital, but it may be more challenging compared to corporations.

3. Avoiding Self-Employment Taxes: A key benefit of a S-corp is the ability for owners to pay themselves a reasonable salary, which is subject to payroll taxes. The remaining business profits are then passed through to the owners and are not subject to self-employment taxes. This can result in significant tax savings compared to a LLC, where the owner's entire business income is subject to self-employment taxes.

4. Continuity of the Business: S-corps have a legal structure that allows the business to continue even if one of the owners dies. The business is a separate legal entity from the owners. C-corps and LLCs also have this benefit.

The other choices are not as optimal:

- C-corp: While C-corps can also raise capital and have continuity, the profits are taxed at the corporate level and then again when distributed to owners, resulting in double taxation.

- LLC: LLCs can raise capital and have continuity, but the entire business income is subject to self-employment taxes, which is a significant disadvantage compared to an S-corp.

- It Depends: While this is a valid answer in some cases, the specific criteria provided in the question clearly point to a S-corp as the best choice.