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I wrote this recently for another source, thought I would share it. Some of you may find it helpful:
Solo Agent: Sole Propietor, Corporation, or LLC?
This is a common question many agents have as it relates to the tax advantages. First things first: If you are getting off the ground, you should be spending your time finding new clients, not worrying about which business entity to choose. As your business matures and you start to become profitable, that is typically the time to start digging deeper. Below is a quick overview of each. Of course, this is a general outline, the devil is always in the details as each situation can be different:
Sole Proprietor: If your net income is under $35,000 per year, this is likely the best option when all things are considered. While you could incorporate, there are additional costs that go with it such as: W-2 payroll compliance reporting, filing Form 1120 or 1120S, K-1 filing, and you need to be more diligent in keeping your books (which you should be doing anyway). A good tax accountant can do that for you, but you are likely looking at an all in cost of at least $1,000 to $1,500 per year.
S-Corporation: If your net income is somewhere in the $40,000 to $200,000 range, it's likely an S-Corp could spell enough tax savings to make it worth the compliance costs. The advantage of an S-Corp is that you can divide your wages into two components: 1.) W-2 compensation as an employee of your corporation that is subject to FICA taxes (Social Security/Medicare). 2.) K-1 income as the owner of the corporation that is not subject to FICA taxes.
Let's do some math as an example, let's say you are netting $70,000 per year as a sole proprietor. You can justify a wage of $40,000 from your corporation (more on this in a later edition). That means the balance of $30,000 would not be subject to FICA taxes (15.3%). $30,000 X 15.3% = $4,590 in savings (it's actually a little less, but I won't go into it for this post). $4,590 - $1,200 in compliance costs = $3,390 in immediate tax savings. You can spend it, invest it in your business, or super charge your savings even further. How you might ask?
Putting it into a tax qualified retirement plan. For example, if you put the $3,390 into a SEP IRA and you are in the 25% federal bracket, that's an additional $847 in tax savings for a total of $4,237. If you are in a state that has an income tax, there would be even more savings.
C-Corporation: As a general rule, once your income gets to be north of $200,000 to $250,000, it may make sense as some point to look at a C-Corp. As your W-2 income goes above the Social Security wage limit of $118,500 (in 2016), the S-Corp loses some of it's attraction (although you still save on the Medicare taxation which is not capped). The C-Corp design allows owners some additional tax deductions that the S-Corp does not, which means at a higher income amount those deductions may prove to be valuable enough to make the switch.
But wait, you didn't mention an LLC???
From the IRS's perspective, the LLC is a disregarded entity. That means that it can be taxed as any of the three options listed above. If you don't make any sort of election, by default, it's considered to be taxed as a sole proprietorship and you file a Schedule C return. If you elect to be taxed as a corporation, you file a Form 1120 (C Corp) or 1120S (S Corp). Why would a sole proprietor form an LLC?
The main argument most make is legal protection. While you should consult an attorney as I don't give legal advice, others in the industry have told me that a solo agent really doesn't have much legal protection against errors and omissions regardless of the entity. Are there other reasons? Yes, there can be some state specific reasons in a handful of states.
