Opinion Legal Briefs Despite hurdles, setting up LLC or corporation make sense By Mark Pestronk / August 03, 2017 Share 1 -- Q: In several recent columns, you have urged self-employed travel professionals to set up their own corporation or limited liability company (LLC). Is there any reason not to do so? Of the two forms of business, which would you recommend and why? Also, can you clearly and simply explain the difference between a C corporation and an S corporation?A: There are fairly good reasons to continue to do business as a sole proprietorship, such as these:• You will incur setup costs if you set up a corporation or LLC. Although every state lets you accomplish the setup by yourself on a state government website, the filing fees can run several hundred dollars. If you need specialized advice or are uncomfortable doing it yourself, an attorney can help you, but legal fees can be as high as $1,500.• Although federal income taxes will be the same regardless of whether you remain a proprietorship or operate as a corporation or an LLC, other taxes may be higher. Some states, including California, require minimum annual business income taxes for corporations and LLCs, no matter how small your income, and some states charge higher unemployment taxes and disability taxes on corporations' owner compensation.• You may need to file a separate federal tax return for your corporation or LLC, and if you use an accountant, the fees could be several thousand dollars more than if you did it yourself.• There is ongoing paperwork for S corporations and LLCs but not for proprietorships. For corporations, you will need minutes, stock certificates and an annual report filed with your state government. LLCs need operating agreements, sometimes even if there is only one owner, as well as annual reports in some states.Despite these foregoing burdens, you are probably better off operating as a corporation or LLC. Of the two, I would typically recommend an LLC because it has fewer ongoing paperwork requirements. However, in some states, you have to place advertisements in local newspapers or jump through other hoops before your LLC is approved by the state, and these kinds of red tape issues may tip the scale in favor of an S corporation.As you have undoubtedly guessed by now, each state has different fees, procedures and other requirements, so the choice can ultimately depend on which state you are in.Unless your attorney advises you differently, you should always establish the corporation or LLC in your home state, not in states that are famous for being attractive to businesses, such as Delaware or Nevada. Setting up there generally provides no advantage because you will then have to qualify the business as an out-of-state company in your state, which is virtually the same as setting up your business in your home state to begin with.An S corporation is just a regular corporation that you set up in your state, which then files a form with the IRS electing to be taxed as though it were a proprietorship (or if there are multiple owners, a partnership). Unless your corporation files this form, it has to pay corporate income taxes, and you then have to pay individual income taxes on the rest of the profits.The name S corporation refers to Subchapter S of the IRS Code, which is the law that permits the company to elect to be taxed as a proprietorship or a partnership. A C corporation is just a corporation that has never made that election with the IRS.