139: How to Decide if My Startup Should be an LLC or S-Corp [Podcast]

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Trying to decide if your startup should be an LLC or S-Corp? 

In the startup world, this is one of the most frequent questions I get. It falls closely in line with

• Do I need a business license?
• Should I incorporate or not?
• How do I find an attorney and CPA?

I have dealt with parts of these subjects in past episodes.

• • Ep 115 – What you need in terms of LLC or business license
  • Ep 56 – Do I need a business license to sell online? 
  • Blog Post – Do I even need a business license or LLC?

But today I want to dive into the issue in another direction – a common-sense strategy for deciding when and what to do.

But I am not crossing over into the world of CPA or an attorney. This is not legal advice – it is common sense advice.

Both the LLC and S-Corp have legal and tax implications – but we want to visit a common-sense thinking about where to start asking questions. 

How to Decide if My Startup Should be an LLC or S-Corp? (Podcast Outline)

1. When you need neither LLC or S-corp
   • No risk of danger. 
     • Selling online courses and online merchandise that is considered normally harmless. Clothing and household items. 
     • Advice or consulting that is not health-related or tied to risk of money. Dating advice or educational advice for instance. 
   • No wealth – Your net worth is not enough to attract frivolous lawsuits. (Under $500,000)
2. When you need Legal protection
   • Risk of health or wealth
     • Selling any food item or weight loss or medical (even vitamins) 
     • You are providing advice or consulting to businesses where they could lose money. 
     • You could cause damage that is expensive to repair. 
     • Someone might get hurt. 
   • You have personal wealth over $500,000
3. Get some corporate structure and insurance
   • A corporate structure gives some distance – if you do it correctly
   • An umbrella policy is basic for business people or anyone with any wealth
   • Specific business insurance like errors and omissions or product liability should be in order. Check with an insurance agent who deals in business insurance. Find a commercial agent. See article in show notes to SBA. 
4. The Tax Man Side
   • If you have significant income in a business and you will take a salary (say over $100,000) you need advice on the best structure. 
   • The difference an S-Corp offers is how self-employment taxes hit you. That is Medicare and Social Security taxes.
   • Great article in show notes about details by LegalZoom.
5. My updated formula for deciding on a side hustle legal structure.
   • If you are just starting and expect a small income (under $25,000) first year, have little risk in your services, and are not wealthy (net worth under $500,000) then just go as a sole proprietorship. 
   • Anything else, seek the advice of a CPA AND an attorney. (Yes both. They do different things.)
   • As you grow and start to move up in income – seek the advice above. 
6. Never get distracted or delayed on this stuff. If it is slowing you down due to indecision, get advice and move on. 

Click here to listen now.

Shout Out

I love the show… I have been inspired…by Tony.L.Horton 

RATING: ★★★★★

“I love the podcast, Dr. Callahan. I have always wanted to be an entrepreneur/inventor. Your podcasts are reigniting my entrepreneur spirit. We meet briefly when I was exploring the IEM program at UAB. I am a UAB alumni (2001) that started my educational journey with a desire to have degrees in both computer science and electrical engineering. However, during my sophomore year at the United States Military Academy, I ran into a roadblock called the Laplace transform. I figured I could be a mechanical engineer instead. Thank you for all you are doing.”

 

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Links mentioned in this episode:

• Past Episodes related to side hustles
  • Ep 137 – How to Find a Business Idea for a Side Hustle
  • Ep 138 – How to Find the Time and Money to Start a Side Business
• Past Episodes related to legal and tax issues
  • Ep 115 – What you need in terms of LLC or business license
  • Ep 56 – Do I need a business license to sell online? 
  • Blog Post – Do I even need a business license or LLC
• Links mentioned in the podcast
  • SBA article on insurance
  • Legal Zoom’s article on LLC vs S-Corp
• Other links and resources
  • Episode 119: Developing an Entrepreneurial Mindset
  • Master of Engineering Management in Information Engineering and Management