Q: Why do people tend to choose the sole prop? And why does it even exist?
A: It’s the natural state of most businesses when they start because you don’t need to technically do anything. You simply fill out a W9 for the people who pay you with your information and a Schedule C with your 1040 and you’re done. It's the easiest structure, but not the tax-efficient one.
Q: I've been receiving income for my consulting work, but I don't have an LLC formed; why do I need one?
A: An LLC (or limited liability corporation) helps separate and indemnify the person from the business dealings. It's also necessary if you wish to be treated as an S-Corp by the IRS which is the linchpin of everything that will enable us to save you money on your taxes.
Q: What is the difference between a schedule C versus a single-member LLC?
A: Legal designation mostly, both types are essentially the same to the business owner it just places some legal space between the individual and business finances.
Q: How can an S-Corp be leveraged when having a corporate job in tandem?
A: It’s doable but complicated; if your business is making enough money it may be worthwhile but unless that’s $60k or more net income in a year outside of your W2 wages it’s probably not worth it.
Q: Is the W-2 similar to K-1 when filing tax as a business versus an employee?
A: Not really, the W2 will detail the wages paid to you as an employee whereas the Schedule K details the net income and other factors that affect the taxability of the business income. They are both necessary in an S-Corp however.
Q: Does an S-Corp pay less tax versus someone who is a self-employed worker such as a sole-proprietor and a schedule C?
A: Yes absolutely; merely by electing to file as an S-Corp you’ve cut your taxes down from being a Schedule C, and if you properly leverage the payroll and retirement benefits per our instruction you will turbo-charge those tax savings.
Q: Is someone who is a schedule c versus someone who is a sole proprietor the same as defined?
A: Yes, though a single-member LLC would also basically be filing a Schedule C.
Q: What is a disregarded entity?
A: If you are a single-member LLC or sole prop you don’t have to file a separate tax return for your business and as such it is “disregarded” by the IRS.
Q: Do you guys advise on where the business should be formatted state-wise?
A: We generally advise S-Corps to domicile in the state they are located to reduce the likelihood of exposure to multiple jurisdictions.
Q: Why do I need a business bank account?
A: In order to keep your business and personal finances separate per IRS regulations a separate bank account is necessary. This also helps us properly identify tax-deductible business transactions and maintain proper financial statements to keep you in compliance of state and federal law.
Q: What if I don't have a business credit card or cannot get one because the company is so new?
A: It's not strictly necessary for the business to have its own card in the company name; you can use a personal credit card as long as it is dedicated to business expenses 100%. You can also reimburse yourself for personal funds used for business from your company later. However, we do recommend for complete separation of business and personal activity that a new credit card with the business name be acquired.
Q: All banks require a physical location address now as part of setting up a business bank account, hence being forced to use a residential address. Do you provide a service that can address this issue as they will flag it?
A: Yes we will allow our corporate address to be used as your S-Corp address if you desire; this will make all federal and state notices be mailed to our address first to be forwarded on but we do offer that service.
Rather than get overwhelmed know that our team here at Formations are experts in helping self-employed professionals to incorporate and manage their S-Corps. We’re here to help so give us a call today