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Ask The Experts: Business Structure

Friday, June 01, 2012

Q: I’ve operated a handyman business for several years as a sole proprietor. I’m now starting a second business as a voice-over artist. I’ll be operating both businesses for at least two years. What would be the best business structure?



A: The question you ask is not a simple one to answer without some additional information. My first comment is that I would not be doing any type of handyman work as a sole proprietor. I would want some type of legal entity protection in the form of either a
limited liability company or a corporation. Which of these would be best is a tax issue.

The most common reason small-business owners incorporate is to protect themselves in case the business runs into financial or legal problems. But, incorporating by itself may not protect you from personal liability. A leading misconception is that incorporating establishes a separate legal business entity from you personally, unlike a sole proprietorship or partnership.

The problem with this misconception is that you cannot circumvent liability for your personal actions.

A second reason many people consider incorporating is to take advantage of corporate tax laws. It’s true that in most situations businesses can decrease their taxes by incorporating. The question is, “Will the tax dollars saved be greater than the 
costs to be incorporated?” It’s important to consider the ongoing expenses for a corporation, like higher accounting fees, state income or franchise taxes, legal expenses and administrative demands. These ongoing costs could wipe out any tax savings from incorporating.

When incorporating, there is also the question of whether to elect S status with the IRS. This choice is strictly based on how the corporation will be taxed. The truth is that there is no way anyone can say the S or the regular C status is better than the LLC without having an intimate knowledge of your business finances.

So why would someone choose a corporation over an LLC? Again, it all comes down to tax advantages, and the only way to determine if there are tax advantages is to crunch the numbers. As a general rule—and I emphasize general—if the taxable profits in the business are more than $25,000, there is the possibility that a corporation might have some tax-saving advantages.

The legal form of a business is an important issue. I would suggest getting professional advice before making a decision. You can give Business 101 a call at 800-649-6273. One of our experts could get more detail about your businesses and be in a better position to evaluate which business structure might suit you the best.



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