Sole Propietership or LLC?

Hi guys,

I have a quick question for you all! My website isn't currently registered as a LLC or any other type of company. I get my checks in my own name. If I register an LLC (or s-corp), what are the benefits of that? Will I be paying LESS in taxes? I know very little about this stuff, so any information is very much appreciated!

 

Stick with the sole-proprietorship unless you A) want to have your website be a separate entity such as for banking purposes or securing a bank loan, B) need to create a company for the purpose of multiple ownership, or C) want keep your website's finances separate from your personal finances. As a sole-proprietor, you can still itemize if it makes sense to do so come tax time. I assume you are US-based.

If you are making a sizable amount of money from your website (a lot more than a single person would need to live on), you may want to consult a CPA to see if you are being pushed into a personal tax bracket that is higher than if you had an LLC.

One other consideration is liability, which would something to ask a lawyer about. If there is a possibility that you could be sued because of products or services you offer, having an LLC can help protect your personal assets.

 

Thanks for the info, mhovingh! Yeah, I am U.S. Based (from Michigan too)! What do you mean my 'itemize'..just curious? So registering an LLC or any other form of company for my website will not be beneficial tax wise? I think I will stick with sole-proprietorship if there is no tax benefit

Any other info is VERY appreciated! Thank you!!

 

I shouldn't have said itemized deductions. That is something separate. What I meant was just "Ordinary and Necessary Business Expenses". That just means any expenses that relate directly to your business, and can be deducted from your income.

It would include things like:
- Home office. This is an area you dedicate to work, such as where you have your computer and desk set up, or a room in your residence where you store products in that you sell. If you rented a place at $6000 per year and used a room to store products you sold through your website, you would take the size of that room vs the total size of the place you were renting to determine the deduction. If the room was 200 sq ft and your total space was 800 sq ft, you would take 1/4 of $6000, which is $1500 and claim that as a business expense. Same goes for heating, cooling, and electricity.
- Car expenses. You can track the mileage you drive with a personal vehicle while performing business activities, like going to the bank to make a deposit or going to buy office supplies. The IRS provides a $ value each year per mile that you can apply as a business expense.
- Office supplies. Desks, chairs, paper, etc. All of it being purchased for business use can be deducted as business expenses.
- Internet and phone, if you use them for business (assuming at least Internet since you have a website).
- Hosting accounts, software purchases, domain purchases, etc. All are business expenses and can be deducted.

There are lots more, but you get the idea I hope. Anything you buy for your business, any bill you pay that is business related, anything you spend that you use to run your business, is deductible as a sole-proprietor when you file your personal taxes. No need for an LLC to be able to deduct.

With things like office equipment, software, and computer equipment, you can break up the expense. If you buy a computer, you can plan on using it for x years. You just divide the cost of the computer by the number of years to get the yearly deduction, or just claim it all at once in the year you purchased it. Whether you do it all at once, or split it up is a bit of a science that a CPA would probably best be able to help you figure out. You could save more money by doing it all in the purchase year, or save more money by doing it over time. This will be specific to your tax situation, which is why a CPA should look at it for you.

The exception is purchases of products that you are selling. That is just calculated as a flat income vs loss. You either buy a product and resell it for a profit, or you lose money on it, directly reflecting in your income for the year. Same thing for something you buy and put into (or make into) a product. An example would be buying beads that you make into beaded jewelry. You just subtract the cost of the beads from what you sell the beaded jewelry for to get your profit/income.

I did forget to mention that if you hire actual employees, you may need to form an LLC. I am not 100% sure if it is necessary, something you would need to research. This only applies to employees where you will have a payroll, not hiring independent contractors such as hiring someone here on DP to write xx articles for your site each month.

One other note about LLC vs sole-proprietorship is that, with an LLC, you have to file taxes quarterly (make estimated payments) as opposed to just doing your taxes once per year (easier imo for someone who isn't doing a lot of transactions in a short time - getting monthly affiliate checks for instance vs buying and selling 100's of different products per month and getting paid for each individual sale).

EDIT: Want to make sure I say that I am not an accountant. I am just sharing what I know from A) running my own online business as a sole-proprietor, and B) having a father who is a CPA and taught me this stuff.

EDIT 2: Just to be clear, the business expense deductions is not a flat value. The IRS has a formula for determining what they are actually worth in terms of deductions. All you need to know is what you spent, the calculations will be done by your tax software or accountant. I just wanted to make sure I mentioned this so you weren't expecting to have all $2000 of your new computer deducted as a flat amount from your income this year.

 

Also note that unless two or more people create the LLC it is treated as a disregarded entity, which is essentially a sole proprietorship anyway.

Each provides some benefits over the others, a simple DBA is easier to shut down over a LLC or Corporation, for example, an LLC or Corporation has asset protections that DBAs do not.

Depending on the state that you want to create your business entity in can also help determine if you want to or not. Some states are not business friendly, costing as much as 3x or more to create a LLC or Corporation. Illinois has businesses fleeing it, while neighboring states, Wisconsin and Missouri, have far less expensive fees.

It also depends on the amount of paperwork that you want to do. Employees, autos, and other things require their own paperwork to be filed, even 1099 employees.

 

Thank you both so much for the great information! I really appreciate it. Like I said, I don't know much about this, so every little bit helps. Thanks again!

 

Sole proprietorships and limited liability companies (LLC) are similar in the fact that they are both examples of the many different types of businesses that an individual can create. However, a sole proprietorship is very different from an LLC and there are a number of advantages and disadvantages that the potential owner(s) of a sole proprietorship or an LLC should be aware of before choosing to form a company.

• [h=2]Size[/h]
  • A sole proprietorship must have a single owner. An LLC, on the other hand, may have any number of owners as long as it has at least one owner (in most states.)
    
    
    
  [h=2]Liability[/h]
  • A sole proprietor may be held personally liable for all of his company's debts while the owners of an LLC are only responsible for debts up to the amount that they invested (in most cases.)
    
    
    
  [h=2]Property[/h]
  • The owner of a sole proprietorship owns all of the company's assets. However, the assets of an LLC are the property of the company itself and not the property of the LLC's owners.
    
    
    
  [h=2]Formation[/h]
  • An individual can form a sole proprietorship simply by acquiring the permits that she needs to start the business (if any are required) while an LLC must file with the state.
    
    
    
  [h=2]Taxes[/h]
  • A sole proprietorship must report its income on its owner's personal tax return while an LLC may choose to file taxes as a sole proprietorship (if it has a single owner), a partnership, or a corporation.
    
    
    

 

You should opt for LLC.. with liability and tax benefits

 

There is no one "right" answer. You just need to consider the advantages and disadvantages of a sole proprietorship versus an LLC. As AWriter mentioned, the cost is definitely a factor. In some states, forming an LLC yourself can cost as little as $50 while in Illinois it is at least $500, and more if you file online!

Further, in some states (California is the worst) you need to consider the annual fees or franchise taxes that you will incur to operate as an LLC.

A more thorough discussion can be found at "Sole Proprietorship or LLC?".

 

Sole proprietorship means you are on the hook for all liabiltiies...whereas LLC is a separate entity...like I think the LLC can file bankruptcy and you are personally not of the hook. but I am not sure of that.