Which Tax Classification and Legal Entity is Best for Your Speaking Business?

Your business will need to choose 1) a legal entity and 2) a tax classification. These are two separate topics but they often get blurred together. You should consult with an attorney to discuss legal entity and an accountant to discuss tax classification. It can sound like everyone has different meanings for the same words. Don’t worry, we are here to help you understand this with confidence.

An accountant helps you decide the tax classification of your business.

An accountant should help you choose a tax classification. You have 5 options which are sole proprietor, partnership, S corp, C corp, or trust. In our experience, most speakers start out as sole proprietors and shift to an S corp when their income level gets to a certain point that it would save money on taxes. Notice that “LLC” is not a tax classification; it is only a type of legal entity.

Your accountant will be running calculations to determine potential tax savings of each classification vs costs of managing each classification. For example, S corps have added expenses of payroll processing and tax filings that a sole proprietor does not. Be ready to discuss your anticipated income. Your accountant will want to know things like how much in sales you expect to earn and what states (or even cities) you will be earning the sales in. Why does that matter? Because, taxes are governed at federal, state, county and city levels. For example, New York City has an additional tax on S corps. The tax rate depends on income level but we commonly see additional taxes of 6.5% – 8.85% there. That additional tax makes a big impact on your accountants calculations.

What are the basic facts about tax classifications?

• A single-member LLC must elect tax classification of sole proprietorship or S corp or C corp.
• A multi-member LLC must elect tax classification of partnership or S corp or C corp.
• A corporation will be taxed as a C corp unless they specifically file a form to the IRS electing S corp classification.
• A sole proprietorship reports to the IRS on Schedule C of the owner’s form 1040.
• An S corp reports to the IRS on the business’s form 1120-S.
• A C corp reports to the IRS on the business’s form 1120.

An attorney helps you decide the legal entity for your business.

An attorney should help you choose a legal entity. You will most likely have 4 options which are sole proprietor, partnership, limited liability company (LLC ) or corporation (corp). In our experience, most speakers start out as sole proprietors and shift to an LLC when their risks increase or they want to shift their ownership structure. Notice that “S corp” is not a legal entity; it is only a tax classification.

Your attorney will be determining the legal entity that best protects the owners. Your attorney will want to know things like how many owners and investors there will be, who they are, where they live, and how they will expect to share in the profits or losses. They will also want to know how the owners and investors will be involved in the daily operations of the business.

What are the basic facts about LLC vs corp legal entities?

• Both an LLC and a corp will help to protect the owner’s personal assets.
• LLC owners are called members. Corp owners are called shareholders.
• LLC’s and corps can have an unlimited number of owners. If the corp elects S corp tax classification, they will be limited to < 100 owners.
• LLC’s and corps can have foreign owners. If the corp elects S corp tax classification, they can only have owners that are US citizens or resident aliens.
• LLC’s and corps can have owners that are corps or partnerships. If the corp elects S corp tax classification, the owners must be individuals only.
• LLC’s cannot provide stocks to their owners. Corps must provide stocks to their owners and those stocks steer how profits are paid out.
• A corporation’s tax classification determines the stock they can provide to owners. An S corp can only offer one class of stock which means they only have one way to divide profits to owners. A C corp can offer various classes of stock which means they have more options for how to divide profits to owners.

Choosing the right legal entity and tax classification should involve conversations with experts in your industry. The distinctions between legal entities and tax classifications are complex but critical for protecting owners and saving money on taxes. At Colvin CPA, we simplify this process and guide you from start-up to scale-up.

Eager to position your speaking business for success with our expert guidance? Connect with us. We offer the tailored advice you need for informed strategic decisions. Start your journey to effective business planning with Colvin CPA today. Contact Us