Q. Would an LLC be better than sole proprietorship for getting financing? – Lincoln
A. “Better” seems to be subjective depending on the applicant, loan amount and purpose of the financing. The simple answer is no.
To my knowledge I have never had experience where the entity formation of the business is the single reason why that business loan application was approved or turned down. That being said, I have had some business owners in situations where lenders seemed less receptive to the business owner's plans for borrowing money if they weren't aware of certain terms. This may have been paranoia on the business owner's part, but if you walk into a lender to ask for money for your business and don't know terms such as LLC, S Corp, EIN, Schedule C, entity, incorporation or 1099, then I could understand the lender's apprehension to lending that business owner money. It may not be “better” to be an LLC, but it definitely brings your business more creditability if the business owner understands the term and the application of the concepts and it applies to the business. It seems in lending, as in many things, perception is reality, and giving the best perception to investors or lenders can help accomplish your business's reality.
Q. You previously mentioned the sometimes-advantage to incorporating a small business, but didn't mention any disadvantage. Is there any? – Lincoln
A. It seems cost is always a disadvantage; at least that is the most common statement from new business owners.
The Nebraska secretary of state's website (www.sos.ne.gov) does a good job of explaining the differences among various forms of incorporation and the process to apply. Nevertheless, the terms and language can become complicated, especially when you don't have experience in the business field. Filing on your own may require some intense reading and many new business owners find themselves gravitating toward professionals such as attorneys or accountants for the initial filing. There is no standard “application” or form to fill out. The State of Nebraska just requires specific information concerning the business, its agent and location, depending on the type of incorporation. Some find this process discouraging and then approach an attorney, accountant or various online services and may pay a fee upward of nearly $500 or more to file for incorporation.
Also, there seems to be some confusion around tax time. Many business owners approach their tax adviser and become highly confused when filing as an LLC or S Corp concerning tax liability, FICA, employees and owner's compensation.
Q. How does filing as an S Corp or LLC or sole proprietorship differ on my tax return? — Plattsmouth
A. That is a loaded question and I highly suggest consulting a tax adviser concerning your specific tax situation. Most of the difference revolves around labor cost and owner's compensation. Tax liability and tax laws have a tendency to change on an annual basis and each year seems to differ in the percentage, deductions and credits. Essentially, filing as an S Corp allows you to W-2 yourself as an employee. The business's corporate tax returns will also be generated in a completely separate return. This requires both your business and you personally to pay FICA and Medicare through a deduction on your personal paystub. Therefore, you may be listed as an employee and as an equity holder owner but the tax liability may differ depending on the earnings of the business and your personal income. Beyond that, the difference is minor. The Schedule C on your personal tax return will allow you to itemize all expenses related to the business whether you are an LLC or sole proprietorship.
Zack Zimmerman is the associate director of the Nebraska Business Development Center in Lincoln. The lead center is at the University of Nebraska at Omaha, but there also are centers in Lincoln, Wayne, North Platte, Kearney, Chadron and Scottsbluff. The centers receive funding from the federal Small Business Administration and are intended to help start, sustain and grow small businesses. If you have a question about creating or growing a small business, email email@example.com.