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Faizan
For tax purposes, an LLC and a Sole Proprietorship are treated similarly. By definition, a limited liability company (LLC) is a business structure that combines the pass-through taxation of a sole proprietorship (or partnership) with the limited liability of a corporation. The income and expenses to the business are both reported on Federal Schedule C and there is no tax law code for LLCs so in the eyes of the IRS, LLCs are seen as a Sole Proprietorship. But even though there is not much difference on a tax level, there are several important reasons why you should strongly consider changing your Sole Proprietorship over to an LLC.
As a Sole Proprietorship, you put your personal assets at risk for liability so if someone brings a law suit against your business, your home, car, investments, and personal savings could all be compromised. Whereas with an LLC, all members are automatically provided limited liability protection. An LLC is considered a separate legal entity and you would not be required to personally pay back debts from personal funds or to settle in a civil suit.
Sole Proprietorships are also usually more likely to be further examined by the Internal Revenue Service. When you form an LLC, the IRS looks at this activity as a more legitimate, for-profit business.
You also save money on your taxes as an LLC because as a Sole Proprietorship, you are taxed on your net income at the self-employment tax rate. For 2012 this self-employment tax rate jumps up to 13.3% (mainly because of the hike in the FICA portion of your self-employment tax which was 10.4% in 2011). An LLC has some flexibility in respect to how it wants to be taxed. It can be taxed as a Sole Proprietorship, or as a Corporation under IRS rules. As a matter of fact, once you convert your Sole Proprietorship to an LLC, you can then request the IRS to treat you like an S-Corp for tax purposes by completing Form 2553 found on the IRS.gov website. The big advantage of being taxed as an S Corp is that you will no longer have to pay the high self-employment tax. The Owner of the LLC that converted to an S-Corp will have to take a salary and his/her salary will be subject to payroll taxes (which are lower than the self-employment tax), but the payroll taxes will not be taxed on the company's net earnings.
Ktasha N. Hardge ("Tasha") is the owner, founder and CEO of Hardge Connections, LLC and brings 20 years of experience in tax compliance and small business consulting services to new and growing businesses in a variety of industries and entity types, throughout the U.S.. She specializes in helping you to keep more of what you make. She also services mid- to high-income individual taxpayers. Additional services offered include year-round Tax Return Preparation including Amended Returns and Prior Year Returns, Tax Planning, Small Business Bookkeeping & Payroll, and Start-up Assistance. For more free tax, business and financial tips and information, send an email to her at khardge@hardgeconnections.com with the subject "Subscribe".
As a Sole Proprietorship, you put your personal assets at risk for liability so if someone brings a law suit against your business, your home, car, investments, and personal savings could all be compromised. Whereas with an LLC, all members are automatically provided limited liability protection. An LLC is considered a separate legal entity and you would not be required to personally pay back debts from personal funds or to settle in a civil suit.
Sole Proprietorships are also usually more likely to be further examined by the Internal Revenue Service. When you form an LLC, the IRS looks at this activity as a more legitimate, for-profit business.
You also save money on your taxes as an LLC because as a Sole Proprietorship, you are taxed on your net income at the self-employment tax rate. For 2012 this self-employment tax rate jumps up to 13.3% (mainly because of the hike in the FICA portion of your self-employment tax which was 10.4% in 2011). An LLC has some flexibility in respect to how it wants to be taxed. It can be taxed as a Sole Proprietorship, or as a Corporation under IRS rules. As a matter of fact, once you convert your Sole Proprietorship to an LLC, you can then request the IRS to treat you like an S-Corp for tax purposes by completing Form 2553 found on the IRS.gov website. The big advantage of being taxed as an S Corp is that you will no longer have to pay the high self-employment tax. The Owner of the LLC that converted to an S-Corp will have to take a salary and his/her salary will be subject to payroll taxes (which are lower than the self-employment tax), but the payroll taxes will not be taxed on the company's net earnings.
Ktasha N. Hardge ("Tasha") is the owner, founder and CEO of Hardge Connections, LLC and brings 20 years of experience in tax compliance and small business consulting services to new and growing businesses in a variety of industries and entity types, throughout the U.S.. She specializes in helping you to keep more of what you make. She also services mid- to high-income individual taxpayers. Additional services offered include year-round Tax Return Preparation including Amended Returns and Prior Year Returns, Tax Planning, Small Business Bookkeeping & Payroll, and Start-up Assistance. For more free tax, business and financial tips and information, send an email to her at khardge@hardgeconnections.com with the subject "Subscribe".
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