Are you self-employed and questioning whether or not you must type a restricted legal responsibility company (LLC) to your small enterprise? Earlier than you make the leap, learn on to be sure you perceive the distinction between these two enterprise entity sorts.
A sole proprietorship is an unincorporated enterprise owned by one individual. Different widespread synonyms for a sole proprietor embrace self-employed, unbiased contractor and freelancer. Your corporation just isn’t an organization or a partnership, and also you report your small business earnings and bills on Schedule C as a part of your private earnings tax return (Kind 1040). Different tax varieties may be required, akin to Schedule SE (to report self-employment tax in your revenue), Kind 4562 (to report enterprise asset purchases and depreciation expense) and Kind 8829 (when you’ve got a home workplace) LegalZoom vs Incfile.
A restricted legal responsibility company is a authorized entity fashioned in line with the legal guidelines of every state. Sometimes, a LLC is created by submitting paperwork along with your state’s enterprise division (generally known as the workplace of the Secretary of State) generally known as the Articles of Group. A LLC may be owned by one individual (a single-member LLC or SMLLC) or by multiple individual (a multi-member LLC or MMLLC).
For tax functions, a LLC can select the way it desires to be taxed. A SMLLC may be taxed as a sole proprietorship or an organization. A MMLLC may be taxed as a partnership or an organization.
So if your small business is presently a sole proprietorship and also you then convert it to a LLC, you possibly can proceed to be taxed as a sole proprietorship regardless that your small business is now a LLC for authorized functions. You’ll proceed to file Schedule C and you’d put the LLC’s identify on the high of the shape as an alternative of your private identify.
You even have the choice of being taxed as an organization. To decide on C Company tax standing, you file Kind 8832 with the IRS. You’ll file a company earnings tax return on Kind 1120. To decide on S Company tax standing, you file Kind 2553 with the IRS. And you’d file a company earnings tax return on Kind 1120S.
Whether or not or not you must convert your sole proprietorship to a LLC, and the way your new LLC needs to be handled for tax functions, is a difficult determination involving a number of crucial components. Earlier than making a change, be certain to perform a little research and seek the advice of with a tax skilled who’s nicely versed within the problems with selection of entity.