Why Some Small Businesses Should NOT be an LLC
The Limited Liability Company (“LLC”) certainly has become a popular form of business entity.
If there is only one member (owner) then setting up these entities has become a breeze.
Just go online, fill out some forms, pay the registration fee and presto, you’re in business.
Just because it’s easy, doesn’t mean you should do it this way.
Why an LLC?
Many small businesses will run their business as a sole-proprietorship. We would not recommend this as there is unlimited liability with this form of entity. All of the sole-proprietors assets are potentially subject to creditors. Not just the assets in the business. Done correctly, the LLC should limit the liability of the business owners. This is the primary reason LLC’s have become so popular.
The ease of setting these entities up, mentioned above, have also contributed to the growth of using LLC’s. Finally, they are fairly simple to administer from a tax perspective. A sole-proprietor or a single-member LLC just completes Schedule C, Profit or Loss From Business and this is part of their individual income tax return.
A sole-proprietor or a member in an LLC will be required to make quarterly estimated tax payments. This is done on Form 1040-ES, Estimated Tax for Individuals. Connecticut taxpayers that need to pay estimated taxes must file Form CT-1040-ES.
What’s the Alternative?
Some taxpayers however would be better served by forming a corporation. As an owner of the corporation they would also become an employee. As such they will receive a paycheck like any other employee. They will have income taxes withheld from their paychecks.
There can be some additional tax filings and expenses of a corporation. As a corporation is both a separate legal and taxable entity, it will need to file an income tax return. This is done on Form 1120 for a C Corporation and on Form 1120-S for a Subchapter S Corporation. There will also be quarterly and annual payroll tax returns including Form 941, 940 and Forms W-2 and W-3. Corporations in Connecticut will have to file quarterly payroll returns and also filings with the Connecticut Department of Labor. Additionally, wages paid in Connecticut the employer must maintain workers compensation insurance.
Face it; some taxpayers don’t have the discipline or cash flow (or both) to make their required estimated tax payments quarterly. They quickly fall behind on the payments and the penalties and interest make the situation much more difficult to get out of. Getting a paycheck and having the income taxes withheld will minimize this issue.
Have you considered using a corporation as your business entity?
We are not rendering legal advice. Consult your attorney for legal advice.
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