I am starting a new business, a small preschool. Should the new corporation be S corporation or a C

It truly depends on several factors. Short term, startup cost and simplicity is a factor and a Sole Propreitor would certainly be appropriate. If you are going to have more than one owner than an S or LLC is better. You definetly don't want to be a C Corp in the current tax environment. Understand that you sit on a three-legged financial stool- your attorney should tell you how to avoid taxation and generate proper structure, your accountant should work with the attorney and do your tax planning, and your insurance agent should enact the protections in concert with the other two legs.

First, whatever you do, DON'T consider using a Sole Proprietorship form of ownership for any business that can incur significant liability (and a day care center could). As for a 'C' corporation, it works fine provided you pay out all of the net income from the business as salary. The LLC and S corp make the most sense when you have partners/co-owners with varying tax rates and situations.

However, a more innovative approach for the type of business you're starting is to not consider it to be a business at all - instead create a non-profit educational organization/foundation. The foundation can provide its executive director and its teachers with salaries while retaining operating surpluses without incurring taxes. Prospective parents will be more impressed by an organization dedicated to serving educational needs FIRST, over an owner's profit making objectives. This was a big factor in our selection of a pre-school.

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Another thing to consider is as an LLC you can also invest in it with your IRA retirement money. You and your IRA can both be partners. You can draw enough money to live on then attribute the rest of the income to your IRA or ROTH IRA. A well structured operating agreement will allow you to do this (get an attorney very familiar to LLC's). The LLC is generally the best way to do it and offers so much more flexibly. S-corp’s unless the IRS changes the rules will become a dinosaur.

Regardless of the decision you come to, WITH consultation / discussion / agreement of/with your accountant AND attorney, if you choose a form of organization on the basis of liability protection for your personal assets (which would seem to be a good idea), keep in mind that any business agreements signed should be signed by you as an officer of the entity (Trevor Usken, President) not by you, private person (Trevor Usken). Doing the latter could cause you to be personally liable rather than maintain some shelter behind the 'corporate veil'.

Small point, but easy to overlook.

Hi Alan -
Congrats on starting a business. We are also located in CA. We are in northern California. We help businesses determine which incorporation to choose and we can do all the filing for you also. Please visit our partners websit at http://www.bizfilings.com/?vendorid=A1740. You can also visit our website at www.hrallencs.com. We are a full-service HR Consulting & Outsourcing firm. We also provide payroll that is 35%-50% cheaper annually than ADP & Paychex.
If you have any question, please contact me at 916-370-7849 or mallen@hrallenconsulting.com.

-Michael