Question Hi John,
I’m changing my small part-time handyman business from sole proprietorship to LLC (limited liability corporation). I have no employees or sub-contractors or anything like that. I work alone.
I filed IRS form SS-4 and received an Employer Identification Number. With the EIN it says I can file form 8832 and become a corporation.
OR I can file form 2553 and file as an S corporation, but it must be filed in a timely fashion.
BUT, if I file as an S corporation, I don’t need to file form 8832.
The original thought was to have an LLC to protect our personal belongings from the business.
Do you understand any of this and can you explain it to me in layman terms?
Do I need to file anything with the state of Massachusetts? All my business is conducted in MA.
Thank you,
Randy
USA-MA
Answer As a single member LLC, you are considered a disregarded entity unless you chose to be taxed as a regular corporation (by filing a form 8832). Since you are a LLC you already have limited liability.
The question you need to ask yourself is do you want the business to survive you and be inherited by your heirs. If so, forming a corporation is best.
As far as taxes go, a C corp is taxed at higher tax rates based on taxable income than is a proprietorship. You also pay FICA taxes on salaries paid to yourself. Under a S-corp the income is taxed to you personally, but you don't pay self employment taxes, as you would under a proprietorship.
So the selection is determined on the expected net income of the company and your need for distributions out of the company.
Make an analysis of your cash needs, and compute the tax effect under all three scenarios (i.e. Sole proprietorship, C-Corporation, and S-Corporation.
As far as MA requirements you will need to address those concerns with a CPA or Attorney in MA.
