If you have ever attended one of my seminars, webinars, or keynote speeches, then you know one piece of advice that I always recommend to new bloggers is to treat your blog like a real business. Well, part of treating the blog like a real business means making it into a real business.
Too many bloggers just try to wing it. They don’t separate personal expense from business/blogging expense, nor do they do monthly/quarterly financial reviews. The biggest mistake of all: they forget about taxes and don’t set anything aside for it. One thing you can count on is tax man will catch up to you. It’s just a matter of time. Make no mistakes about it. If you make money by blogging, you will owe taxes on it. Therefore, it’s to your advantage to set things up to pay as little income tax as possible.
When starting a new business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. Legal and tax considerations enter into selecting a business structure.
While I can give you the advantage and disadvantage of each, I recommend you consult a professional to help you decide which is best for you. I run my blog as a corporation because it’s the best way for me. However, it may not be the best method for you. Here’s a rundown on the different business structures you ca use.
A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation. A sole proprietor is the most common business structure because it’s the less expensive to set up. The main disadvantage is it exposes you to unlimited liabilities.
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership’s income or loss on his or her tax return.
In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income.
A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.
The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.
S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.
This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.
To qualify for S corporation status, the corporation must meet the following requirements:
- Be a domestic corporation
- Have only allowable shareholders
- Including individuals, certain trust, and estates and
- May not include partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders
- Have one class of stock
- Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.
Like I said previously, you need to consult your accountant or lawyer to help you decide which business structure is best for your blogging business. Most bloggers start off as a sole proprietorship and then convert to one of the other structures as they grow from a hobby to real business.