Sole Proprietorship vs. Partnership vs. LLC vs. S-corporation vs. C-corporation

To follow up on the advice to incorporate as a C-corp, I did some research on my own. My opinion is that this advice is probably bad in general, and definitely bad for us. My recommendation is to run The Usual Error as a partnership, at least for now.

We don’t need the liability protection of an LLC or corporation, for two reasons. One, we’re already married and hence liable for each other’s debts anyway. (There are loopholes here, but I’m not interested in exploiting them.) Two, the liability protection of LLCs doesn’t count for actions performed directly by their owners. Since we’re not currently planning on having any employees other than myself and Kyeli, that adds up to zero liability protection anyway.

After that, the main distinguishing factors are taxation, overhead, and fees.

  • A sole proprietorship or partnership is taxed like you’re self-employed. You pay the self-employment tax, but it adds up to the same tax you’d pay if you were a business and your own employee. An LLP doesn’t add anything that would be useful to us.
  • An LLC doesn’t affect taxation, since it’s pass-through. In fact, it it would be slightly disadvantageous wrt taxation because of the Texas franchise tax.
  • An S-corp is taxed differently, and you get to avoid paying the SE tax, but the advantages only kick in after the business is making enough profits to pay its owner/employees a “reasonable salary” and then some.[1] This might be good for us in the future, but would just be unnecessary overhead for now.
  • A C-corp… well, a C-corp just sucks. If you’re really clever, you might be able to figure out some way to use C-corp tax law to your advantage, but good luck making it be worth the double taxation.

Hence, a partnership looks like the way to go for us. Another advantage of this is that we avoid participating in a corporation which is accorded legal personhood, which is a law we find troublesome and very problematic.

Here are the sources I found useful in my research:

Disclaimer: This is just my understanding after doing two hours of internet research (and some past dabbling in accounting), so please, by no means take it as tax or legal advice. (:

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