If you run your blog as a business, one of the important decisions you must make early on deals with choice of entity. This is an important business decision for any business, not just bloggers, and it can affect how you are taxed and also your legal liability.
As a CPA, I do a lot of (legal) tax planning with my clients so that they can keep more of their hard earned money in their own pocket. When I meet with people who are going to start a business or who have recently started a business, choice of entity is one of the most important issues that we discuss.
Although I am specifically referring to U.S. entities, some of the concepts discussed will also likely apply to entities in foreign jurisdictions as well.
I list below 5 of the most common business entities that you might consider for your blog.
- Sole Proprietorship
A sole proprietorship consists of an individual who runs an unincorporated trade or business. This appears to be the form of entity most commonly used by bloggers.
A sole proprietorship is the easiest type of business to set up and manage. Sole proprietors don’t have to file a separate entity tax return for federal income tax purposes, which may help minimize professional fees.
The big downside of using a sole proprietorship is that there is unlimited liability for all business actions and debts. Having limited liability could sure come in handy if you were ever sued. One way to minimize liability while keeping the tax simplicity of a sole proprietorship is to form a single member LLC, which is discussed below.
- C Corporation
A C Corporation is an incorporated business entity with a legal status separate from that of its owners. A shareholder’s liability is generally limited to his or her investment in the corporation. Another advantage of a C Corporation is that it can raise capital by issuing stock.
The big disadvantage of a C Corporation is that it is subject to double taxation. For federal income tax purposes, the corporation files Form 1120 and pays tax on company profits. Any dividends paid to shareholders are also taxable to the shareholder, resulting in 2 layers of tax.
Many businesses today, including blogs, choose not to operate as a C Corporation because of the double taxation issue. There are other legal entities that provide limited liability without subjecting the company and owners to double taxation. Additionally, C Corporations tend to have high compliance and administrative burdens.
- S Corporation
Similar to a C Corporation, an S Corporation is an incorporated business entity with a legal status separate from that of its owners. A shareholder’s liability is generally limited to his or her investment in the corporation.
However, for tax purposes, an S Corporation is treated as a pass through entity. This means that there is generally no entity level tax (although there are exceptions), and all profits and losses flow through to the shareholders to be taxed at the shareholder level. Shareholders are taxed on earnings even if no distributions are actually made. Form 1120S is the federal income tax return filed for an S Corporation.
Unlike many other types of entities, there are very strict limitations and restrictions on the number of shareholders allowed, as well as on who can be a shareholder of an S Corporation. If you violate these rules, you could lose your S Corp status, which could have disastrous consequences.
- Limited Liability Company
LLCs are hybrid entities that offer the legal protection of a corporation but the option to be taxed as a pass through entity (i.e. partnership or disregarded entity), meaning there is no double taxation. The owners of an LLC are called “members.”
If an LLC has more than one member, it is generally taxed as a partnership. If it only has one member, it is generally disregarded for federal income tax purposes (but not legal purposes) and taxed as a sole proprietorship. Income is generally taxed directly to the member or members regardless of distributions.
A partnership is another type of pass through entity that has 2 or more owners. There is no federal partnership level tax and all income flows through to the respective partners to be taxed at the partner level, regardless of what distributions have been made. A partnership generally files Form 1065 for federal income tax purposes.
A general partner is generally liable for all partnership debt, whereas a limited partner’s liability is generally limited to his or her investment in the partnership. There are a number of different types of partnerships.
Sole Proprietorships vs Single Member LLCs
If you run your blog as a business, you should consider an appropriate type of entity for your blog. For blogs with only one owner, sole proprietorships and single member LLCs tend to be very common choices.
In general, a sole proprietorship is the most simple and least expensive type of entity. It is very easy to create and terminate, but the owner generally has unlimited liability for all business actions and debts.
A sole proprietorship may be most appropriate where there is little risk associated with the business (or any risk may be hedged against with insurance), the business is just getting started, and profits are low or nonexistent. It may not be the best choice if the nature of the business is hazardous.
Many businesses start as sole proprietorships, but then convert to an LLC or other type of entity later on once they have grown or their needs have changed.
A single member LLC may be a little more burdensome to set up and maintain, but it generally provides much more legal protection than a sole proprietorship.
Neither has the disadvantage of double taxation or requires the filing of a separate federal income tax return.
Disclaimer: The above article is provided for informational purposes only and should not be interpreted as professional financial, legal, or tax advice. The issues involved in choosing an appropriate business entity are complex and this article by no means captures all of them. Additionally, certain laws vary from state to state, so it’s important to obtain appropriate legal and tax advice for your specific situation.
This post was written by LD, a CPA and CFP® who blogs at Personal Finance Insider. You can find out more about LD and sign up for his free personal finance e-lessons (covering all of the major topics in a good personal financial plan) here.