November 19, 2011 – San Francisco, CA. At Safe Harbor CPAs, we specialize in helping small businesses throughout the San Francisco Bay Area understand the organizational and tax advantages (or disadvantages) of how best to set up your new small business. In this blog post, we hope to set out in plain English some of the issues. Contact us for a free consult if you are starting a small business in San Francisco – every situation is unique, and our advice will differ based on your individual and business tax needs.
Small Business Formation in San Francisco
Most small businesses start out as a sole proprietorship. This means that your income and the income of the business are one and the same; it also means that your taxes are directly influenced by the businesses. A second form of small business formation is the S corporation, or S corp. The big advantage here is that income flows through the S corp to you personally, but for legal liability issues your business assets / income are separate from your personal. This can come in handy if you are ever involved in litigation; the S Corp “shields” your personal assets from corporate litigation.
A third form of business formation is the C Corp. Here the income and taxes of the business are separate from you personally. The disadvantage here is double taxation – the corporation has to pay tax, first, and then you have to pay tax, second, on any withdrawals from the corporate profits. Finally, the new kid on the block is the LLC (or limited liability corporation). It is is a sort of hybrid between the S and the sole proprietorship.
California Taxes and Small Business Formation
We live in a high tax state, and in a high tax city. Among the issues are the state taxes but also the payroll taxes levied on you and your business. Each form of small business organization can have a major impact on your small business tax planning, even down to the impact on your children’s income if they are hired by the business.
You can Google ‘Small Business Formation’ and there are some great articles on the issue. But even better, is to reach out to Safe Harbor CPA for a free consult. No two situations are identical, and we can help advise you on setting up your small business in San Francisco, in the SF Bay Area, or anywhere in California so that you minimize taxes and risk, and maximize income opportunities!