About once a week, we form a small business for a new small business owner. An entrepreneur will contact us and form an LLC or an S corporation, or potentially some other type. I normally sit down with them for about an hour and talk through a variety of legal issues. I'm going to condense that down to a short summary version here. The first issue is, which type of business entity should I choose? Most businesses that are being started are going to be one of two types: LLC or S Corp. When I say S Corp, I mean a corporation which elects to be taxed as a subchapter S corporation. In other words, rather than paying tax at the corporate level and then again at the owner level, the tax passes through the S corporation and is only paid at the corporate or owner level. An LLC also has that same approach. Now you might say, what's the difference between the S Corp and the LLC? They both provide limited liability equally. However, the S Corp permits you to deduct money under certain circumstances from self-employment tax, which will save you about 15%. Let me give you an example. Let's say you are a business that makes $100,000 in profits per year. So, you may have a million dollars in total sales but $900,000 in expenses, so only $100,000 in profit. In an S corporation, that entire $100,000 in profits would be subject to regular income tax as well as self-employment tax, which is going to be 15%. So, if you're in a 35% tax bracket plus 15% self-employment tax, you may be paying close to $50,000 in taxes. It's a lot of money. In an S Corp, you can avoid some of that self-employment tax. Again, that's...
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Video instructions and help with filling out and completing When Form 8865 Corporations
