Which Online Business Mistake Will You Make?

byHowardJaros

2.8K followers

1 month ago

As a serial entrepreneur, a subject near and dear to my heart is the type of business setup one should have for running a profitable business or online business (Sole Proprietorship, LLC, or S-Corporation). Please note that this discussion is directed toward income earners in the United States of America.

Do you need to worry about having a business entity for your online business? Would setting up an official company for your new enterprise help you? Would it be a big mistake if you didn't?

Do you want to save money on your taxes? The proper choice for your business could save you thousands of dollars, especially if your business makes $100,000 or more a year.

I have many feelings about this subject as I have trained hundreds of new business owners here in the US on the benefits of an official business entity for small businesses, but I decided to ask my friend, ChatGPT 4o, for unbiased information on the subject.

So I asked my AI buddy if an online affiliate marketer should have a business entity like an LLC or S-corporation versus being a sole proprietorship.

ChatGPT said:

Whether an online affiliate marketer should establish a business entity like an LLC (Limited Liability Company) or an S-corporation versus operating as a sole proprietorship depends on factors like liability protection, tax benefits, and your long-term business goals. Here's a breakdown to help you decide:

Sole Proprietorship

Pros:

• Simplicity: Easy and inexpensive to set up. In many cases, you can start right away without formal registration (though you may need a DBA—"Doing Business As"—if operating under a business name). EG - Howard Jaros dba HOW Enterprises.
• Ease of taxes: Income and expenses are reported on your personal tax return using Schedule C.

Cons:

• Liability risk: No separation between personal and business assets. If something goes wrong (e.g., lawsuits, debts), your personal assets are at risk.
• Limited tax advantages: No opportunity to split income or optimize taxes beyond basic deductions.

LLC (Limited Liability Company)

Pros:

• Liability protection: Separates your personal assets from business liabilities, offering peace of mind if something goes wrong.
• Tax flexibility: By default, an LLC is taxed as a sole proprietorship (single-member LLC) or a partnership (multi-member LLC). However, you can elect to be taxed as an S-corporation, which may offer tax savings.
• Credibility: Having an LLC adds professionalism to your business, which can help when partnering with affiliate programs or other companies.

Cons:

• Cost: There are formation and annual filing fees, which vary by state.
• Administrative tasks: While simpler than a corporation, there’s more paperwork than a sole proprietorship (e.g., maintaining an operating agreement, filing annual reports).

S-Corporation

Pros:

• Tax savings: You can draw a reasonable salary and pay yourself the rest as distributions, which aren't subject to self-employment tax. This can save money as your business income grows.
• Liability protection: Like an LLC, it separates personal and business assets.
• Perceived credibility: An S-corporation can enhance the image of your business.

Cons:

• Complexity and cost: Requires more administrative work (e.g., payroll, tax filings, corporate formalities) and typically higher costs for setup and maintenance.
• Profit threshold: The tax savings only make sense if your business earns enough to justify the extra administrative and accounting costs.

When to Consider Each Option

• Sole Proprietorship: Best for those just starting or operating at a small scale. If your income is low and liability risk minimal, this is the simplest choice.
• LLC: A good step up if you’re earning significant revenue or want liability protection while keeping things relatively straightforward.
• S-Corporation: Worth exploring once your income surpasses ~$40,000–$50,000 annually. The tax savings can offset the additional complexity and costs.

Other Considerations

• Liability exposure: If you’re worried about personal liability (e.g., potential lawsuits or debts), consider an LLC or S-corporation.
• Tax benefits: Speak with a tax professional to see how much you could save with an S-corporation compared to other options.
• State requirements: Each state has different rules, fees, and tax implications for business entities.

Chat GPTs Final Advice

Starting as a sole proprietorship is fine for most affiliate marketers who are just getting started. As your business grows or if liability becomes a concern, transitioning to an LLC or S-corporation may be wise. Consulting with a legal or financial advisor can provide personalized guidance based on your goals and income.

Please share your thoughts on this topic. This is a brief overview from AI on this subject, but it is very factual and concise.

Proper business setup of an online business, as it starts to make money, can save a lot of money when it comes to tax liability. That's why it's important to address this topic.

Remember, if you are an online business owner who does not have taxes deducted from income gained from a W-2 type job, and you have a significant income gained through your business, you must pay taxes quarterly, or you may incur penalties for tax underpayment at year's end.

Thank you for your responses! It will help guide the next installment on this subject.

Have a great day!

PS - I have an S-Corporation.