Sole proprietor vs LLC vs SCorp

Sole proprietor has the most unsecure status. In case if someone will sue you, they can have an access to your personal assets. LLC and Corporations are separate entities from your personal assets.

From tax prospective:

- Sole proprietors and LLCs with one owner  files their taxes for business on individual tax return 1040 form Schedule C.

- Multi-members LLCs could be treated as Partnership or S-Corporation. Separate entity tax return 1065 for Partnerships or 1120S for S-corporations. After you have to do your individual tax return too.

Sole proprietors and partners in Partnership have to pay Self-employment and Income tax.

S-Corp shareholders doesn't pay Self-employment tax on pass-through income, they pay only income tax. But you have to receive Reasonable Compensation from your S-Corp (W2 for the officer-owner).

Self-employment income from Schedule C and Partnership tax return counted for SS benefits calculations. Distributions from S-Corp are not counted towards your SS benefits calculations.

You can choose whatever is better for you based on this considerations.

Please see the link for CA LLC organization.

https://www.sos.ca.gov/business-programs/cannabizfile/cannabis-forms-and-fees/limited-liability-companies-llc-california

Thank you for participating in this event!

Olga S.

An LLC is a business entity formed and regulated under the laws of the state where it was created. For tax purposes, a single-member LLC (SMLLC), by default, is treated as a disregarded entity. This means that you would file a Sch. C with your individual income tax return. A multi-member LLC (MMLLC), by default, is treated as a partnership. This means that you would file a partnership return, and any income, loss, credits, etc. would flow through to you and would be reflected on your individual income tax return via Sch. K-1 from the partnership.

Both the SMLLC & MMLLC can elect to be treated as a corporation and taxed as such. As a corporation, you can elect to be taxed as an S Corporation and any income, loss, credits, etc. would flow through to you and would be reflected on your individual income tax return via Sch. K-1 from the S Corp.

The sole proprietorship, unlike the LLC or S Corp., would have unlimited liability, meaning that your personal assets could be used to satisfy business debts and actions.

The sole proprietorship's net income would be subject to both personal income tax and self-employment tax.

A partner/member in a MMLLC, taxed as a partnership, would be tax taxed on their share of the business income (including guaranteed payments). That income and guaranteed payments would be subject to both personal income tax and self-employment tax.

An employee-shareholder in either a SMLLC or a MMLLC would receive wages for services rendered (subject to FICA taxes). The wages paid to the employee-shareholder must be reasonable and are subject to personal income tax; however, the additional profits passed through to the shareholder are taxable only for income tax purposes but not for self-employment tax.

The following link to the Small Business Administration discusses Business Structures in more detail: https://www.sba.gov/business-guide/launch-your-business/choose-business-structure

The following link to the IRS discusses Business Structures in more detail as well: https://www.irs.gov/businesses/small-businesses-self-employed/business-structures