You have finally made the jump and started a business of your own. Now it is time to start thinking about how to protect your assets. What if someone is injured while at your business? What if your business goes into severe debt? If you are running your small business as a sole proprietorship, creditors of your business can go after you individually or any lawsuit brought against your business is brought against you as an individual. This means that any asset that you own through your business, or any asset you own as an individual, could be taken in a settlement or judgment.
If you have already started thinking about how to protect your personal assets from those of your business, you are likely contemplating a choice that many business owners face: Should your enterprise be structured as a limited liability corporation (LLC) or an S corporation (S corp). The two organizational forms have similarities and differences which can make choosing between them confusing. Each state may also have different rules about the operation or liabilities associated with the LLC or S Corp. You will also want to get input from an accountant or tax attorney in order to help you decide what makes the most financial sense for your business.
The major advantage of organizing your business as either an LLC or an S corp, rather than a sole proprietorship, is that you are protecting your personal assets from the creditors of your business. LLC, or limited liability company, means exactly that, there is limited liability. As a business owner in Arizona you would only be responsible for your investment in the company. For example, if you invest $15,000 into your business and take on $20,000 in debt, the only potential liability to a creditor would be that $15,000 investment.
There are also financial benefits to both LLC’s and S Corps. Both can deduct pre-tax expenses, such as travel, computers/equipment, phone bills, advertising, car expenses, and health care premiums. Additionally, they both can help you avoid paying both personal and corporate taxes. The difference is that in an S corp, owners pay themselves salaries plus receive dividends from any additional profits the corporation may earn, while all the income and expenses from the business get reported on the LLC operator’s personal income tax return.
More Arizona LLC Pros:
The owner of a single member LLC does not have to file a tax return for the LLC as they only need to report the activity on their personal tax return. Most LLC forms are very short for single member LLCs. The cost of setting up an LLC is inexpensive. Further, LLC’s can generally be set up with the state quickly.
Arizona LLC Cons:
Single member LLC owners are required to pay self-employment tax on income generated in the LLC, which means making quarterly estimated payments to the IRS. Further, the LLC must be operated outside personal affairs in order to truly protect your personal assets from liability. As a business owner you must know when you are operating a business and when you are operating your life.
More Arizona S Corp Pros:
The advantage of an S corp is that it offers tax benefits when it comes to profits. The S corp pays its employees a salary, deducting payroll expenses like federal taxes and FICA. Then, any remaining profits from the company can be distributed to the owners as dividends, which are taxed at a lower rate than income.
Arizona S Corp Cons:
It costs more to form an S corp. Each state has their own requirements for annual or semiannual paperwork that must be filed. In Arizona, an annual report is required but typically available to file electronically. The Arizona Corporation Commission will give you monthly penalties if it is not filed timely. Further, there can be additional state taxes for S corps. Shareholders should pay attention to paying themselves a “reasonable” salary for the work they perform for the S corp, since the IRS is increasingly scrutinizing S corps for this practice.
If you are interested in setting up an LLC or S corp, or would like more information about them please call (623) 551-9366.
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