The following information is supplied by a Pennsylvania accountant. I am not an accountant and I don't play one on TV!
Self employed? You might want to read and consider your situation. Your own accountant can help you decide what kind of business you should be working under.
Get professional advice before you decide!
I do tax planning, tax preparation and Audit and Collections Representation, primarily in Western Pennsylvania. I am an Enrolled Agent, Certified Tax Representation Consultant, hold a Series 66 Investment Advisory License with Venn Wealth & Benefit Services (Venn and Halas Consulting are not affiliated entities) and a Life, Health and Property Casualty Insurance License in the Commonwealth of PA. I have been in business for 17 years.
You and your buddy have it all figured out. You've been working construction projects for a few years as an employee, and doing some side jobs under the table or, for beer and pizza. You've learned a lot and figured you two are all ready to strike out on your own. You saw an advertisement online praising the virtues of forming an LLC. So, you filled out the forms paid the fee and got an acknowledgement letter of your new gig from the IRS, you two are official now, baby!
Before you go too far into it, but still kinda after the fact, you decide to make an appointment with a local tax professional to find out the things you need to do, and after that meeting your heart sinks. You find out that you now have to file a brand-new tax form, a Form 1065, IN ADDITION to the Form 1040 you've been filing for years, as well as a state version of that form. You also find out from your IRS acknowledgment letter that they are expecting that form be filed in March of the following year. (Even if you made nothing)
This new 1065 form also has some additional forms that require information be taken directly from your books. Uh-oh, what books? Financial record books, and you better have them. This will necessitate a bookkeeper, as you are a skilled laborer not an accountant. There's another few hundred a month to have someone keep your books. (Yes, I know the commercials for a certain popular bookkeeping software of the day make it seem easy, but it ain't always so, trust me.)
You also have a new tax to pay, self-employment tax, on all the earnings you take out of the business. You learn it's a wise idea to open up a separate bank account and that all deposits and expenditures of the business be made to and from this account. Uh-oh haven't been doing that. There are a few other things he also mentioned but your brain shut down about 15 minutes ago.
At this point you might be thinking that I'm anti-corporation and LLC, and you would be wrong. What I AM is anti-jumping into anything before you are fully informed of what you are getting yourself into. LLCs and corporations are great business concepts that provide protection for owners/shareholders/stakeholders, as well as the ability to more easily sell or transfer that business to others upon the death or retirement of its original owners among other benefits.
In many cases, one is better off operating as a sole proprietor the first year, especially if one is new to that industry, or being self-employed or both. Buy a bigger liability insurance policy the first year. This applies primarily to "desk jockey" ventures like the one yours truly is in (accounting). It doesn't apply very well to starting your own dynamite manufacturing facility. If things go great the first year, and you pick up on the flow of running your own show and understand what you've gotten yourself into and embrace it, LLC or corporation away! But if you decide it isn't your cup of tea, you can simply walk away from a sole proprietorship in most cases ( i.e. if you don't have any payroll.) You can't simply walk away from the LLC or corporation; it requires some additional steps.
So, in conclusion, look BEFORE you leap.
website: www. halasconsulting.com