Start-Up Business – Sole Proprietorship or C-Corp?

Sole proprietorships and C-Corps both have tax and legal benefits, but in order to obtain money through the BORSA plan, a start-up business owner must establish a C-Corp and here’s why . . .

A sole proprietorship is a business structure where the owner is fully liable for all the assets and debits of the business. In a sole proprietorship, also known as a DBA (John Smith doing business as . . .) all you really need to do is begin working. You don’t need to file any particular paperwork, just the usual licenses and permits that any other business needs to file. You are the chief cook and bottle washer and the sole responsibility for the success or failure of the business is in your hands. However, you are also personally responsible for paying business debts and income taxes. It can be a dangerous proposition, because if your business loses a lawsuit, doesn’t pay for goods or services or incurs other unpaid debt, you can lose your personal savings and possessions, including your house.

When you have a sole proprietorship, you report all the business income and losses right on your individual income taxes- Form 1040, with schedule C attached in most cases. This means you'll have to pay a "self-employment" tax, consisting of Social Security taxes, and Medicare, as well as paying estimated taxes throughout the year.

A C-Corporation, also known as a regular corporation, on the other hand is a business structure that is legally independent from its owners. There is no personal tax liability for its owners and it has a board of directors and shareholders. It is somewhat more complicated to set up than other business structures because it is established with your state’s authorities and must follow all the laws for corporations in that state.

There are many tax advantages to forming a C-Corp, including the fact that all income is taxed at the corporate rate before it is distributed to shareholders and owners. Your C-Corp is eligible for many tax deductions, including salaries, rents, repairs and maintenance, profit sharing and benefits plans.

A C-Corp is also the only type of business structure that is eligible for a BORSA (Business Owners Retirement Savings Account.) A BORSA can be used to fund the start-up of your business using the funds in your 401(k) or other retirement plans. According to ERISA, which is one of the governing bodies of law that regulates the BORSA plan, you must have a C-Corp business structure to use a BORSA. ERISA allows for investment in qualified employer securities, which is defined by Congress as stock in a corporation- which means it must be a C-Corp or an S-Corp. Since an S-Corp can only be owned by an individual, not a retirement plan, a C-Corp is the only option available.

DRD/ CPAs is a professional corporation of certified public accountants and business consultants who are experts in forming BORSA plans. To find out if a C-Corp and a BORSA plan can be the vehicle for the financing for your business start-up or franchise, call 832-615-2887 today and let DRDA PC help you make your business dreams come true.