A few articles ago, we talked about how to know if your ministry is also a business or not. That’s a great start to know how best to protect yourself from unnecessary audit risk and maximize your potential profits, but there is a lot more to the story.
An important next step is to determine the best way to set up your business. There are three primary options for most authors or speakers – sole proprietorship, LLC, or S-Corp. There is plenty of complexity that goes into this decision. At the same time, there are some easily accessible guidelines that can help you make the best decision.
When does a sole proprietorship make sense?
A sole proprietorship is the default ownership structure for every business. If you have not set up a different form of business, then you have a sole proprietorship.
A sole proprietorship does not provide any protection for bankruptcy or liability because this type of business is not considered a separate entity. In the eyes of the IRS, you and your business are the same, and your business is an extension of you. Further, there are no specific tax benefits with a sole proprietorship.
Most authors and speakers begin with a sole proprietorship. Especially in the early phases, this is the simplest and most appropriate approach for your ministry. As you begin to experience some financial success, you will want to consider moving to an LLC or an S-Corp.
There are two variables that I suggest my clients review before moving beyond a sole proprietorship:
- Does your writing or speaking expose you to specific risks of lawsuits? In most cases, authors and speakers have a low risk of litigation. If your topics are controversial though, you may want to move to a different business structure sooner rather than later.
- Has your revenue exceeded $20,000 in the last twelve months? First, a quick definition – revenue is cash in the door. If your revenue is greater than $20,000 then it’s time to move beyond a sole proprietorship.
What’s the difference between LLCs and S-Corps?
Both a limited liability company (LLC) and a small corporation (S-Corp) provide you with greater protection than a sole proprietorship, but there are some important distinctions.
At its core, an LLC is a simpler form of business than an S-Corp. An S-Corp is bound by most of the rules and regulations that a larger corporation is expected to uphold. S-Corps are expected to hold shareholder meetings and maintain minutes from those meetings. An S-Corp is required in most states to have an operating agreement that outlines the roles and responsibilities of each shareholder.
Sometimes an S-Corp makes more sense.
However, this does not mean an LLC is the best choice for your enterprise either. There are four distinct reasons an S-Corp would make the most sense for you:
- If you have or anticipate having employees (not contractors) then an S-Corp is preferable. Payroll taxes are more easily managed.
- If you think investors may be giving you capital in exchange for ownership, it will be easier to manage this type of transaction with an S-Corp.
- If you already have a board of advisors as part of your current structure. The burden of paperwork would be less onerous.
- If you plan to have a number of unrelated business entities with the same owners, then an S-Corp with these multiple businesses underneath would be the best tax strategy.
At the end of the day, the primary difference between an LLC and an S-Corp is the number of roles you are seen as playing in your organization. With an LLC, you have one role – owner.
An S-Corp allows you to act as a shareholder and also potentially as an employee. This provides more flexibility in how you provide cash to yourself from the company. At the same time, there is an increased risk of audit if your cash flow is not managed properly.
Ideally, you would consult with a tax or legal professional before finalizing any shift in business structure. But, hopefully, this article has introduced you to some of the complexities within this decision, so you can be a more informed entrepreneur.
Chris Morris lives in Phoenix, Arizona with his wife, three teenagers, and his dog Freckles (she brings sanity to us all). In addition to being a coffee snob, he enjoys a great card game like Bears vs. Babies. He enjoys his work as an accountant with creative entrepreneurs because their passion is contagious, and every day is a new adventure with his clients.