12 Dec Staying Self Employed Vs. Opening Up An S-Corp
There’s always a dilemma when it comes to setting up a business, a lot of individuals who don’t have the business acumen or are afraid to make major decisions which can make or mar something huge are the ones finding it difficult to decide to make the business personal or S-Corp. These sets of individuals are always quick to partner with any available or interested person on a business plan or proposal. This doesn’t mean they can foot the business bills themselves; let us call it having low self-esteem when it comes to business. The idea of partnering with people in business is not bad; it comes down to weighing the advantages and disadvantages before deciding which to go for. In this article, we will be detailing the concept behind going for the individual business, its benefits and possible problems. We will also look at that of S-corp., its advantage and disadvantage as well. At the end of this article, you, as the reader, will be able to weigh your option on which is more beneficial to go for in other to see that your dream business reach higher feet.
The majority of people calling themselves self-employed are sole proprietors. Many have attained this legal status without even knowing it. The definition is as simple as if you start running a business by yourself and do not form or incorporate a limited liability company; you are automatically a self-employed. Unlike S-corp, general partnership, LLP, or LLC, a self-employed is not a separate legal entity. The business owner (proprietor) personally owns all the assets of the business, will be in sole charge of the decision he/she makes in the business and being their local business accountant of the business.
One big reason why being self-employed is so popular is that it is by far the cheapest and simplest way to organize a one-owner business. You don’t have to file any papers or do anything special to set up a sole proprietorship, other than the usual permit, license, and other regulatory requirements your state and locality imposes on any business, whether personal or cooperate.
Advantages of being self-employed
- You control your life
As a self-employed business owner, your destiny is in your own hands. That means you have the freedom to make decisions that will shape the present and future for yourself, your business, and your family.
- You get to choose your hours
Rather than being contracted to set hours, you can start as late or as early as you want. Being self-employed means, you get to decide the time convenient for you to work. In as much as this inevitably provides a much-desired level of flexibility, the self-employed entrepreneur ought to be disciplined in order to run a successful enterprise. Scheduling personal time to go to work depends on the type of work.
- Control Over All Business Aspects
In cooperation, a lot of workers easily get tired of being told what to do. Having control over every aspect of a company is one of the biggest advantages of self-employment. You decide what your company does, you pick the branding elements that make your business unique, and lastly, you choose the target audience that you think will bring a massive return to your business without any objection.
The potential disadvantages of being self-employed
- Higher Taxes
- Prepare For Unsteady Pay
- No Insurance
Opening Up An S-Corp
Understanding what S-Corp means, even if your business has only one owner, that doesn’t stop it from being legally organized as a corporation, with you as the sole shareholder as well as the director and president. One-owner corporations are not new, they are very common. After forming the corporation in whatever state of choice, you can still choose to have it taxed as an S corporation by filing an election with the IRS. This means filing IRS Form 2253 with the IRS.
Advantages of S-Corp
The advantages of an S corporation often outweigh the disadvantages. The S corporation structure is very beneficial when it’s time to discontinue or transfer ownership of the business. These advantages are typically unavailable to sole proprietorships. Below are the advantages of S- Corp.
- Protected assets
An S-corp protects the personal assets of every shareholder. However, absent an express personal guarantee, a shareholder does not have personal liability for the business debts and liabilities of the corporation. This means creditors cannot pursue the personal assets of the shareholders to pay business debts. In a general partnership or sole proprietorship, owners and the business are legally considered the same, thus leaving person (business owner) assets vulnerable.
- Pass-through taxation
An S-corp does not pay federal taxes at the corporate level. (Most, but not all states follow the federal rules). Hence checking the federal rule of cooperation location is pertinent. In S-Corp, any income or loss is passed through to shareholders who report it in their personal income tax returns. It means that business losses can offset other income on the shareholders’ tax returns to reduce the income tax paid. This is extremely helpful in the Corporation Startup Accountant phase of a new business
- Tax-favorable characterization of income
S-corp shareholders can also be employees of the business; this can make them draw salaries as employees. Besides, they can also receive dividends from the corporation, as well as other distributions that are tax-free up to the extent of their investment in the corporation. Hence, a reasonable characterization of distributions dividends or as salary can help the owner (operator) reduce self-employment tax liability, while still generating business expense and wages-paid deductions for the corporation.
Disadvantages of S-Corp
- Stock ownership restrictions
- Closer IRS scrutiny
- Taxable fringe benefits
In conclusion, we can see the advantage and disadvantage of self-employment and s-corporation, the bottom line is that both are will be a wise choice if one seeks to start a new business, I cannot specifically point or recommend, that should be based on personal preference.