Bob, who is a close friend, has decided to start his own consulting firm. He has
ID: 2402423 • Letter: B
Question
Bob, who is a close friend, has decided to start his own consulting firm. He has received conflicting information regarding the best business structure to reduce his tax liability. He will be the only employee; however, he is willing to consider creating an S-Corporation. Compare and contrast the benefits of Corporations, LLCs and S-Corps and make a recommendation regarding which would be the most advantageous for Bob. Defend your position. Please provide me some additional information that is not already answered.
Explanation / Answer
The advantages of a C-Corp include:
The disadvantage of a C-Corp is double taxation. The first taxation takes effect at the corporate level, on the corporation’s net income. The second taxation takes effect at the shareholder’s level, when or if the profits are distributed to business owners as dividends.
The advantages of an LLC include:
The disadvantages of an LLC include:
The advantages of an S-Corporation are:
The disadvantages of a S-Corporation are:
After reviewing the advantages and disadvantages of all three entities, I would explain to Bob it would be most advantageous for him to form an LLC, while eventually being taxed as an S-Corp. To begin, his personal assets would be protected from creditors of the business. Basically stated, limited liability means Bob cannot be responsible for more than his investment in the company. It is normally only a single page form to set up a single member LLC. Additionally, it is fairly inexpensive, and there is not as much “red tape” when creating an LLC. If the time comes that Bob’s business begins earning more revenue, he can choose to become taxed as an S-Corp. By being taxed as an S-Corp, Bob will save money when it comes to paying taxes. Bob would get the legal benefits of running his business as an LLC while saving money by being taxed as an S-Corp.