In general, consider the following guidelines:
- If you are the only owner, strongly consider a single member LLC because the entity can be formed by filing a one-page form, there are no corporate formalities and no corporate or partnership tax return is necessary. Your taxes will be filed by Schedule C to your personal form 1040.
- If your business looks and acts like a partnership (i.e., a group of consultants), then the LLC may be a good fit because, in its simplest form, it is essentially a partnership. You will file a partnership tax return.
- If your business will have investors who are not officers or employees ,or if employees will retain ownership after leaving the company (i.e., an Internet start-up), then a corporation is the most natural fit.
- If your start-up will have foreign investors (non-resident aliens) or corporate investors, then an LLC can be set up to look and act very much like a corporation. An S Corporation cannot have foreign investors or corporate (or LLC) investors.
- Compare California tax differences as follows:
The S Corporation pays a California Corporate tax of 1.5% with a minimum tax of $800. Remember, this tax is only on profits. In contrast, LLCs pay an $800 tax plus a fee on total income attributable to California according to the following schedule (this fee is on total income rather than on profits):
Total Income Fee $250,000 - $499,999.99 $900 $500,000 - $999,999.99 $2,500 $1,000000 – 4,999,999.99 $6,000 $5,000,000 or more $11,790
NOTE: Speak with your C.P.A. before selecting an entity. We have observed that accountants generally prefer S Corporations to LLCs. We also see accountants file S elections for LLCs. The IRS will treat an LLC as an S Corporation for tax purposes upon the filing of an election. If your accountant is going to elect S Corporation status for an LLC, we would rather see you select the S Corporation from the beginning.