How to Start a Business: Picking A Business Structure Right For You

Posted on 16 August 2012

Tips For Starting A Business: A Corporation How To Guide – Most of us out there have some great ideas in life. Some of them are a heck of a lot easier to monetize than others. However, the problem that so many Americans have with their businesses is that they just don’t know how to start a business. As a result, they often end up giving up on their big business dreams, or they end up starting a business that just doesn’t work for them. Figure out how to form a business that works for you with this easy guide to starting a business!

There are several different ways to form a business, but if you starting a business by yourself, you only really have a handful of options. You can just do your business on a Schedule C, or you can form an LLC or form a Corporation. If you elect to have an LLC, you will need to figure out whether you want your LLC to be a corporation or not. If so, or if you just choose to start straight at a corporation, you’ll have to decide whether you want your corporation to be treated as a C-Corporation or an S-Corporation.

Why You Don’t Want To Be A Schedule C: There are really only downsides to being on a Schedule C. The worst reason of all is that the individual is subject to income tax at the state level (if your state has an income tax), along with the federal level, and before you have to pay income tax, you have to pay what is known as self-employment tax. In the years 2011 and 2012, self-employment tax is equal to 13.3% of your bottom line. In other words, if your business made $100,000 and you had $40,000 in expenses to make that $100,000, you would have to pay 13.3% of $60,000 before you ever paid a dime in income tax. That’s a whopping $7,980 in tax BEFORE income taxes kick in.

Why You Don’t Want To Be A C-Corporation: If you are working with just yourself, at this point, there really is no point to be a C-Corporation in most states. Do be sure to check with your accountant before forming a corporation though, as laws for every state are treated just a bit differently. The good news about forming a C-Corporation or an LLC that is treated as a C-Corporation is that you have what is known as corporate protection. That means if your product or service that you are selling ends up causing harm to one of your clients and they try to sue you, they can only sue the assets that belong to your corporation. In other words, they can’t go after your personal house, your personal car, and the likes. C-Corporations have their own tax structure, but that structure is higher than that of a personal tax return. Generally, if your business is making legitimate money, a C-Corp will cost you a ton in taxes.

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Why You Do Want To Be An S-Corporation: Again, before we begin, we have to reiterate the fact that you should really speak to an accountant before starting a business depending upon what state you are in. Generally speaking though, starting an S-Corporation is the way to go if you are a single business owner and don’t intend on ever having partners. Remember that 13.3% self-employment tax that we were talking about before with a Schedule C? That goes out the window. You only pay income tax on the bottom line of the corporation. So if you had $100,000 in income and $40,000 in expenses, you would only pay income taxes on that $60,000, not that whopping $7,980 in addition to income taxes as we spoke about before. You also get all of the perks of corporation protection that we spoke about earlier.

The downside to an S-Corporation is that there is a lot more paperwork that needs to be filled out for you to be in business. You have to take what is known as a “fair value salary.” Think of that as your corporation’s way of paying you for your services. You will have to pay that annoying 13.3% on the salary that you pay to yourself, but you won’t have to pay anything more than income tax on the rest of the money that you make. So what is a “fair value salary?” The good news is that there really isn’t a rule in the book that shows you what a “fair value” is for the services that you provide to your own business. Generally, if you’re making less than $50,000 for the year, if you pay yourself a $10,000 salary, you should be just fine. And if you’re making more than $50,000 or so, make sure that you give yourself a salary of at least 20% of what you make for the year.

So now you know the tricks of the trade and can form your own business right away! Now go out there and live out the great American dream of owning your own business and starting making big money today!