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OzFest
New Member

Sole Proprietor vs LLC

Apologies for being off-topic for today's conversation.  If you can't answer this question today I understand.  

I am a W2 employee of a large corporation.  I also am a 1099 with a side-gig group of consultants.  My wife is a Sole Proprietor of an in-home music studio.  We were also just given a small shaved-ice business to run this summer (for our boys to run).   

My question is, how much sense does it make to set up LLCs for my wife's music studio and the shaved ice business instead of keeping them as Sole Proprietor entities?  Would it also make sense for me to setup and LLC for my consulting business?  The Sole Proprietor is so easy when I complete my taxes using TurboTax.  Even the deductions and amortization sections are just simple and clean to figure out.  Would making and LLC for the music studio, consulting business and the shaved ice business just overly complicate things?  Is there a huge financial incentive for creating and LLC?  I've heard it can be a tax break somehow, but am not quite sure if it would be worth it.  I can give you some ballpark figures of how much we make in each of these gigs if that would help with your answer.  

Thanks in advance for your reply.  

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1 Reply
dsoile
Employee Tax Expert

Sole Proprietor vs LLC

Hello. No need to apologize. I hope this event has been helpful for you. Assuming the matters you mentioned are so. Lets start with one of the difference(s) between a Sole-Proprietor and an LLC. Assuming that both you and your spouse are each running your respective businesses solo, the biggest difference is that with structuring your business as an LLC, you have protection as far as creditors, person(s), etc.. coming after your personal assets, thus an LLC protects your personal (non-business) assets from lawsuits, liquidation, etc., whereas with structure as a Sole-Proprietor, you do not get that protection. Again, assuming each of you are solo as far as running your business, you would structure as a single-member LLC, thus ensuring your respective personal assets are protected and shielded from business matters. So from a protection stand-point, it makes sense to structure as an LLC.

 

Another benefit of structuring as a single-member LLC for your situation is that you have versatility. Unlike, with a sole-proprietorship structure, in which you can only file a Form 1040 via Schedule C thus being treated as a sole-proprietor for tax purposes, while having that protection. With structure as a single-member LLC, you have the option of either being treated as sole-proprietor for tax purposes, S-Corp for tax purposes, or C-Corp for tax purposes. The latter options (C-Corp and S-Corp) require more paperwork of submission, but each respective structure has their benefits. 

 

It would not complicate things if you decide to become a single-member LLC while still being treated as a sole-proprietor for tax purposes (Schedule C). It's just matter of applying for EIN via IRS and submitting paperwork to your state's Secretary of State. 

 

As far as financial incentive of being a single-member LLC, it depends on how you wanted to be treated for tax purposes as well as your compliance with requirements of you when you choose the manner in which you want to be treated for tax purposes. As a single member LLC (sm-LLC), you are considered a pass-through entity, so any business activity as far as income, losses, and other items pass through you on your individual taxes. Lets say you become a sm-LLC and elect to be treated as a sole-proprietor for tax purposes (Schedule C), all your business' net income is subject to federal taxes, state taxes (if you live in a state that taxes income), & payroll taxes (FICA taxes). Whereas, if youre a sm-LLC being treated as an S-Corp for tax purposes. Your business' net income will be subject to federal and state taxes, but not FICA taxes. Only the salary you pay yourself as an officer (which is a HARD LINE requirement from IRS for all S-Corp) and employees, if you have any, will be subject to payroll taxes. So, in that case, the finacial incentive for structuring as a sm-LLC is in the form of savings via payroll taxes. 

 

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