Which business to register

[grantemary2]

Dear TT,

I am going to be starting a consultancy business that will be closely tied to my current firm.  I will be working for myself, therefore only me in the business.  Is the best business type to register for an LLC and for tax purposes is it best to record the business with the IRS as a sole proprietor?

[Donna F 77]

Congratulations on your new business!  The type of business entity that you choose will be based on your specific circumstances.  We would recommend speaking with a tax advisor to determine the best route for you.  However, a lot of businesses start out as sole proprietors initially.  In regards to starting an LLC - that's a great choice for the liability protection against your personal assets.  If you are a single member LLC, you would file your federal tax return as a sole proprietor since IRS does not acknowledge LLCs.

[grantemary2]

Thank you Donna for your answer. It confirms what I have planned to do.  I the only remaining questions are: 1) are there any downsides to registering as an LLC but reporting to the IRS as a sole proprietor?

2) Does turbotax offer tax advisor services if I don't have my own tax advisor?

[Donna F 77]

Unfortunately I can't really answer your question properly because I don't know your complete situation.  I can't think of any "down side" to choosing to file taxes as a sole proprietor when you are first starting out.  You are able to determine what type of tax entity your LLC will file as for federal tax purposes.  You could elect to be an S-corporation, partnership (if there is more than one member), etc.  At this time TurboTax does not have advising services.

[LMT27]

So only giving an answer to point you to places that could help because this exact thing happened to me trying to start my business. I registered an LLC in Oct 2020 so in 4th quarter at the suggestion of a business lawyer I consulted with (I will never register a business in a 4th quarter ever again, I ended up filing for LLC termination when I filed federal taxes at the advice of my new tax advisor because I could see all the extra money we were paying for nothing, so I basically wasted money on an LLC to have it just for 1 quarter). The IRS was not the problem I filed sole prop, sched C, calculated expenses etc. that was the easy part but our state was a whole headache. Because we didn't have a location we had to use our physical address for all docs and the PO Box we set up was pointless. Our state imposed extra fees, and we were forced to file state taxes even though our state does not have personal income tax, once you have a business its a requirement where I live. On top of paying a lawyer money which we could've just set up the LLC ourselves through the state website for free, we had to jump through hoops proving our address should not be assessed as a business asset so we wouldn't owe more state property taxes on the business side come March 2022, and we received this request for information in Nov 2021 so it was a scramble. I wish the lawyer would have just explained the sole prop to us because we could have started as sole prop and then worked our way up to LLC + S Corp which is my personal goal because I want to W2 pay myself and write that off as an expense to lower my tax liability but I'm not there yet and I will only do so with a tax advisor if I can ever find one that is worth keeping . So all of that to say look for your state's official website, it usually ends in .gov and sometimes they have small business advocates or mentors, also go to your local chamber of commerce and ask if they have any small business tax experts they can refer you to because it is usually the extra fees, taxes, and state paperwork that is a headache more than the federal taxes surprisingly.