When a client comes in our office, we always discuss what type of business they should have. The discussion comes down to three issues: Liability, Simplicity, and of course Taxes.
The one we discuss the least is Liability. Although CPA’s are well versed in the areas of business law, we should not give legal advice. All we tell them is that as a Sole Proprietor or Single-Member LLC, there is greater personal risk. Our CPA’s also remind them that any assets in the business may be seized if there is a legal issue. However, for the issues dealing with liability protection, people should consult with an attorney.
As far as simplicity, Sole Proprietors are the easiest to set up and manage. S-Corporations operate quite simply also. Partnerships and C-Corporations have unique challenges that require more planning and additional accounting requirements.
For taxes, Sole Proprietors (including Single-Member LLC’s) and C-Corporations have major tax disadvantages. S-Corporations and Multi-Member LLC’s (taxed as Partnerships) can save business owners thousands of tax dollars if utilized properly.
Even though we always go through a series of questions that business owners need to answer to make sure we give them the proper advice, our recommendation for choice of entity usually boils down to how many owners the business has. If there is only one owner, we would suggest an S-Corporation; if there are multiple owners, we would suggest an LLC taxed as a Partnership.