A close relative is giving consulting a try. For now she's operating as a vanilla sole proprietor to minimize the red tape until she decides if it's going to work out and be sustainable/profitable. If she decides it does, she'll certainly talk to a lawyer and a tax pro before messing with entities. But in the meantime we're trying to get some perspectives on different forms of business. The most common info one tends to read seems these days to recommend operating as a sole prop, as an S-corp, or as an LLC that chooses to be taxed as a sole prop or an S-corp. However, the other day we were reading an interesting book by Nolo Press on business structure that made some pretty interesting arguments for a one-man operation organizing as a C-corp instead of an S-corp (if you're not going to be a sole prop or disregarded entity). Some of the author's arguments:
- For a one-man operation, an S-corp doesn't give much of a chance to avoid payroll taxes because pretty much all the profit has to be taken as wages.
- For a one-man operation, the double-taxation a C-corp brings into play can be made mostly irrelevant if most/all of the profits are taken out as wages, making a C-corp no worse than an S-corp if you go that route.
- However, with a C-corp you have the option to not take out all profits as wages. The remainder will indeed be taxed at the corporate level, but then this gives higher bracket people the ability to split their business income between themselves (as wages) and the corporation (as corporate profits) and get the first ,000 of corporate profits taxed at only 15%. While those profits will eventually be subject to a second tax when they ultimately come out, that can be deferred indefinitely, may be at a low rate (as qualified dividends), or can be paid out as wages in years when you are personally in a low bracket.
- A C-corp gives full fringe benefit flexibility, allowing access to plans and fringes that are disallowed to sole proprietors or to S-corp owners. On the downside, it's also more complicated, may subject you to state corporate minimum taxes, may cost more to set up, have higher compliance and filing costs, etc. Comments?
-- Rich Carreiro snipped-for-privacy@rlcarr.com