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SHOULD YOU INCORPORATE OR FORM A LIMITED LIABILITY COMPANY?
There are advantages and disadvantages to each type of organization:
Nontaxable fringe benefits for shareholder-owners (health ins, education, life ins.)
Rents and Royalty Payments (shareholder can rent to corp, shielding income from payroll tax).
Losses on Small Business Stock §1244
Gains on Small Business Stock §1045 and §1202
Income and deductions are passed through to stockholders avoiding corporate-level tax.
Tax on profits are passed through to shareholders and taxed as ordinary income.
Capital Gains also are passed throught as separately stated items on Schedule K-1, Form 1120S
If an S Corp has a loss it can be passed thru to the shareholder, whereas a C Corp can only use losses to offset gains in other years.
LIMITED LIABILITY COMPANIES (LLC)
An LLC is has some characteristics of an S Corporation and some characteristics of a partnership and avoids personal liability responsibilities applicable to partnership debts.
An LLC can ELECT how it wants to be taxed: It can elect to be taxed as a Corp. whether it is a single-member LLC or a multiple-member LLC.
If it is a single-member LLC you can either be taxed as a sole-proprietor or as a Corporation. A multiple-member LLC can be taxed as either a partnership or as a corporation.
Taxxcpa Comment: There seems to be an increasing tendancy for small business to form LLCs, especially single-member LLCs. Tax reporting is simpler if you file as a sole proprietor. However, if you elect to be taxed as an S Corp, you can shield some of your profits from self-employment social security (15.3%) if you:
 pay yourself a reasonable salary and pay social security on the salary and
 report the baance as pass-thru income on Form 1120S and on page 2 of Schedule E of Form 1040.
Before deciding on the type of organization for your business you need to discuss it with your CPA and your attorney. There are state tax considerations also, even if you live in a no-income-tax state like I do.
Corporations and LLCs provide some liability protection, but liability insurance is also advisable since you could have personal liability for acts you, personally, perform.
Also look into paying your taxes quarterly, either by Form 1040ES available at
http://www.irs.gov/formspubs/index.html or by electronic fund transfers at times of your choice--for more information about electronic transfers see www.eftps.gov
This information is not intended to be advice to the recipient.In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.