Establishing Your Business - LLC or S-Corp?

Our first Hot Topic Meeting was all about Microschool Governance - specifically LLCs, Non-Profits, Private Member Associations/Private Education Associations (PMA/PEA). Our own legal expert Daniel Suhr took us through the pros and cons of each entity and basic things to consider when making that decision for yourself. You will want to look at each option considering these three guideposts: control, tax deductibility, and risk.

So let’s begin by looking at the option of an LLC (Limited Liability Company). In this structure, you are the owner, and this business is as Daniel put it, “your baby”. You are investing your own money and you hope to eventually see things pay off. In this structure, your financial benefit might be as a salaried employee or as an owner after all expenses are paid. In other words you are looking to make a profit, maybe not now but certainly eventually! 

In an LLC you will be filing both state and federal tax returns annually. We highly recommend you maintain a separate set of books for this business– keeping your personal and business accounts separate. This will make tax time a breeze and keep you from any unwanted confusion of mixed accounts. If needed you can always consider hiring an accountant or lawyer to help you set this up. 

Starting an LLC (Limited Liability Company) involves a few key steps. Here is a general guide to getting started:

1. Choose a Name: Select a unique and appropriate name for your LLC. Make sure it complies with your state's naming requirements and does not conflict with any existing businesses.

2. Check Availability: Conduct a thorough search to ensure the name you have chosen is not already in use by another business. You can check with your state's Secretary of State office or use online business name search tools.

3. Choose a Registered Agent: Designate a registered agent (this can be yourself!) who will receive legal and tax documents on behalf of your LLC. The agent can be an individual with a physical address in the state where you are forming the LLC or a registered agent service.

4. File Articles of Organization: Prepare and file the Articles of Organization with the Secretary of State or the relevant state agency. This document typically includes the LLC's name, business address, registered agent information, and other required information. Each state has its own specific form and filing fee.

5. Create an Operating Agreement: While not always a legal requirement, it is recommended to have an operating agreement in place. This document outlines the ownership, management structure, profit distribution, and other essential details of your LLC. It helps protect the LLC's limited liability status.

6. Obtain Necessary Permits and Licenses: Depending on your business activities, you may need to obtain permits, licenses, or other certifications. Check with local, state, and federal agencies to ensure compliance with all applicable regulations.

7. Get an EIN: Obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This number is used for tax purposes and is required if you plan to hire employees, open a business bank account, or file certain taxes.

8. Register for State and Local Taxes: Register your LLC for state and local taxes, such as sales tax or employer withholding tax. Familiarize yourself with the tax obligations specific to your jurisdiction.

9. Open a Business Bank Account: Separate your personal and business finances by opening a dedicated business bank account. This helps maintain accurate records and simplifies tax reporting.

10.We highly recommend you insure your entity with basic liability insurance for a business, and any other coverage that seems prudent.

11. Comply with Ongoing Requirements: Be aware of any annual filing requirements, reporting obligations, taxes, or fees that your LLC must comply with on an ongoing basis. Failure to meet these requirements can result in penalties or the loss of your LLC status.

Remember, the specific steps and requirements may vary by state, so it is important to consult with a qualified attorney or accountant for advice tailored to your situation.

While on this topic let’s look at S-Corps, here you will also be filing an annual tax return. Filing as a Corporation has some things to consider as well, and folks usually use this type of business to account for different sources of income or categories of expense. So it may make sense to go this route if you have those complications already and would make this method necessary– or if you already have a corporation you can use it to open a microschool. If you don't, this would not be the recommended way to open a microschool. You need articles of incorporation, and distributions are done in a more public and formal way.

In summary, we can see that while both S-Corps and LLCs provide limited liability protection, the main differences lie in taxation, ownership restrictions, and formalities. The choice between the two depends on the specific needs and goals of the business owners. It is crucial to consult with a legal or tax professional to determine which structure is most suitable for your particular situation, including taxation considerations particular to your situation.