Sole Proprietor, LLC, S-Corp?
As you decide to move forward with breeding, a tax question you need to answer is how to structure your business. Will you be a sole proprietor? An LLC? An S-Corp? There are other structure options as well, but these are three of the common ones many breeders consider.
It can be very confusing determining the best way to structure your business, and the decision may be greatly influenced by how large of a breeding program you are operating.
Knowing how to structure
appropriately is important.
If you are only doing a litter or two here and there, a sole proprietorship or LLC may be satisfactory. If you are setting up a large breeding program, you may want to consider being an S-Corp. If you are unsure of what is best for your scenario, hire a lawyer to assess your business and provide you a recommendation.
What are the differences?
A sole proprietor “is someone who owns an unincorporated business by himself or herself.” The advantage of a sole proprietorship is the simplicity. There is no difference between the business and the person who owns the business — which means the owner has all profits. In a sole proprietorship the owner is also responsible for all the business’s debts, losses and liabilities.
A limited liability company (LLC) is a bit more confusing and complicated. The IRS says an LLC is a “business structure allowed by state statute.” It is set up under state law, so you need to know the regulations required by your state.
S-Corporations are a company or group of people who are allowed to act as a single legal entity. This means that the company is separate from its owners and there is no personal liability. S-Corp avoids double taxation. There are strict IRS standards to qualify as an S-Corp.
Here is my personal story.
In 2008, my husband and I (ex-husband now) experienced a horrific audit situation. I had been breeding for nearly 8 years. I tracked expenses and income with a simple leger on my computer, and I deposited funds from litters into my personal bank account. When the audit took place I was asked to provide documentation for sales contracts or stud service contracts for any income brought in, and I had to provide receipts for stud services I’d paid or dogs I’d purchased. These are things I didn’t have for many of those situations. I had worked with people I knew and not kept a good paper trail of contracts and receipts.
Big mistake.
Our audit wasn’t the typical audit, according to our CPA that had previously been an IRS auditor himself. It was brutal. And long. And frustrating. And they asked for things he’d never heard of anyone having to provide before…like copies of contracts. And in the end we learned a lot of valuable lessons about having complete and thorough records for everything. We also hired a lawyer during the audit to assess how I ran my business and followed his recommendations for how to structure for taxes in the future. His advice gave us peace of mind in knowing we were doing things right. We never wanted to experience another audit again!
The importance of structuring your business properly can’t be emphasized enough. It’s one of the first things a breeder should think about.
So, will you be a sole proprietor, LLC, or S-Corp?
https://www.sba.gov/business-guide/launch-your-business/choose-business-structure