LLC vs S Corp

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Nov 14, 2008 9:24 am

Looking to form new business.. Contemplating between LLC and S corp..



Leaning towards LLC because I will be the only person(no support staff) and that way the taxes just pass through the LLC straight to me..



It seems with the S corp their is double tax, first on the corp and second on my income..



Any thoughts?



I hate the idea of starting over...

Nov 14, 2008 9:42 am

I think your mistaken on the double tax, that would be a C corp. S corp and LLC are very similiar..where the net income flows to the owner.

Instead of hating the idea, embrace it.  If you have this negative thought process, you will be less than successful. Change is tough, but a year or two down the road you will look back and wonder what all the fuss was about.  Maybe partner up with an Independent insurance agent or CPA or even another advisor. 
Nov 14, 2008 9:50 am

Reason for starting over(not in terms of assets, but marketing, firm name, office location) was that my partner and I had different ideas about the future direction of the firm.



Yeah sorry I am waiting for my CPA to call back regarding this... getting kind of impatient(it's been 8 hrs where is he)..



Is the LLC easier to set up, less reporting?



Nov 14, 2008 10:22 am

Ahhh..my bad.  Yes, I believe, the LLC is easier to setup and report.  Own everything and have the corp rent from you.  Even if it is furniture/computers etc...just a way to pull money out at a lower tax rate.

Nov 14, 2008 10:51 am

From a tax standpoint, there will be no difference between being an LLC and a sole proprietorship.

Nov 14, 2008 1:55 pm

There is more nuance and what-ifs to this issue than has been, or is likely to be, captured in this thread, so it's money well spent to get proper tax and legal advice on this point.

There are various pros/cons for both S corp and LLC, some tax related, some liability related, some related to flexibility of ownership structure, and others related to administrative hassle.  It's not that complicated but it is a worthwhile and minimal investment to have these explained as they pertain to your specific situation.  Get a prescription for your symptoms, not your neighbor's.

Don't be penny wise and pound foolish.

Nov 15, 2008 1:32 pm

Wow...a lot of bad information here.  First of all, I can tell you that for TAX purposes, an LLC is IGNORED.  That's right...IGNORED.  If you set up an LLC for one person, the tax default is a schedule C sole proprietorship.  If you set up an LLC for more than one person, the default is a partnership.  If you want any other type of entity (such as an S-Corp), there's still work to do.  You still have to incorporate and there is a checkbox form to treat your LLC as an S-Corp.

 
Based on you acting as a one-man shop, an LLC will give you SOME liability protection, but like an S-Corp, under the right circumstances, that veil of protection can be pierced.  If you want some liability protection AND tax advantages, an S-Corp will serve you nicely.  The LLC would probably be overkill for a one-man shop if you are already incorporated.
 
Something else to understand...as we progress forward, it looks more and more likely that one of the big advantages of an S-Corp (avoidance of some self-employment (social security) taxes) will be taken away.  This is especially likely if the Obama administration lifts the ceiling on FICA taxes.
 
Some corrections of misinformation above:
 
1.  S-Corp dividends are NOT taxed as regular dividends.  They are taxed as ordinary income in whatever bracket you happen to land in.
2.  LLC taxed as a sole-prop?  Yes, IF you are a one-man entity and IF you do not elect to be taxed as an S-Corp or C-Corp.
3.  S-Corp is NOT double-taxed.  It is a flow-through entity.
4.  LLC easier to set up and report...that's definitely debatable.  The LLC again, is NOT a tax entity.  It is a legal entity.  If you want a tax entity, incorporation is the only way I know of for a one-man shop to have a separate TAX entity.
 
Squash, for what you're trying to do, an S-Corp is probably your best bet as it will give you SOME legal protection and several potential tax-savings mechanisms (under current law at least).  I'll close by telling you that I'm not an authority on the subject either, but I am a CPA and I just went through some CPE that included a section on LLC's so it's fairly fresh in my mind.  Do not use this as advice as I take no responsibility if I said anything incorrect myself (which is entirely possible).  Consider it information which will help you understand your tax advisor's advice and recommendations.  Good luck.
Nov 15, 2008 1:54 pm

My CPA was telling me that I would have hold documented meetings and minutes, which may require more cost, than just setting up an LLC..



He also confirmed what you said that simply an LLC would just be fore liability, no tax advantages, since it would be simply an additional form when he files my taxes at the end of the year..



I think I am going to start with the LLC, and then if my production continues to increase, look into what kinds of tax advantages there are. (He mentioned that the tax advantages would be more beneficial if my income was more than it will be this year)

Nov 15, 2008 2:17 pm

It sounds like you're getting good advice to me.  I will tell you that the sum total of my documented meetings are an annual set of minutes indicating that I met with myself and reviewed my financials (less than one page of minutes).  Pretty simple to be honest.  Certainly, you'll have additional costs in filing an S-Corp tax return (I file my own since I'm also a CPA), but unless you have enough income to generate sufficient tax savings to justify the cost, there's no sense in going forward with the S-Corp at this time.  I gave that opinion on the assumption that you were going to generate at least $200K gross, which is just another reason you should be careful about taking advice from folks on the internet that don't know your total situation.

 
I was not aware that LLC's do not have to document meetings, but I guess it makes sense if you are a sole proprietorship.
Nov 18, 2008 2:29 pm

Has anyone "estimated" what this gross earnings level should be, to take advantage of any tax savings for going S-Corp? Is it $100k? $200k?

 
 
Nov 18, 2008 5:21 pm

It very much depends upon what your individual cost-benefit picture looks like.  If it costs $1,000 to form an S-Corp and $1,500 a year to file payroll and corporate tax returns, you'd have to save at least $1,750/year to recoup your costs in four years(longer if you consider interest).  Let's say your hypothetical practice grosses $200K and after rent, assistant, etc., nets about $120K.  If you pay yourself out at 40%, you've paid $80K in salary.  You can draw the other $40K as dividends subject to ordinary income tax rates.  What you save in this simplistic example is FICA/medicare taxes on that $40K, calculated as follows: ($22K*12.4%+$40K*2.9%=$3,888.00).  That $3,888.00 tax savings makes the deal work for you just on that basis.  This is but one example of potential tax savings.  If you have a larger practice and own the building and/or equipment, you can also pay yourself rent and avoid FICA/medicare taxes on that portion also.  There are other such tricks of the trade that can be employed, but for the full scoop, you really need to talk to your tax advisor anyway.

 
If you cut my theoretical practice in half, obviously the savings are significantly reduced to the point that it's questionable whether or not the extra tax work cost justifies setting up an entirely separate corporate entity, although I've not even touched the value of the potential liability savings if someone slipped and fell down in your lobby.
 
The bottom line is, these tax breaks may soon be a thing of the past anyway, so don't rely on anything you get here...talk to your lawyer and your tax advisor.
Jan 13, 2009 11:39 pm

so you do not pay SE Tax on Dividends?

Jan 14, 2009 12:12 am

Not at this point, but stay tuned...it seems like every year there is talk about eliminating this advantage.

Jan 14, 2009 8:00 pm

Great information.  Please spare me the bricks some of you will want to toss my way, but is there a tax advantage to having my S-corp own my car or pay my country club dues (assuming I use the membership to entertaining clients and the like)? What else can or should I expense thru the company?

Jan 15, 2009 1:04 am

In short, you should expense everything you and your accountant agree is reasonable.  Certainly corporate auto leases and country club dues (when used for entertaining clients) are candidates for expensing through a corporation.  A cell phone with internet access is another favorite that comes to mind.  Be creative, but be prepared to defend your logic.

Jan 22, 2009 2:17 pm
Jedi:

Has anyone "estimated" what this gross earnings level should be, to take advantage of any tax savings for going S-Corp? Is it $100k? $200k?

 
From a tax point of view, you are better with Sub S when you are dealing with self employment taxes.  The biggest tax you will run into is FICA.  Just try to pay yourself 1/2 of profit and 1/2 salary, and IRS should leave you alone.  1/2 profit has no FICA tax at 15%.
 
 
Jan 22, 2009 3:14 pm

Does an LLC cover what E/O insurance doesnt?

Jan 22, 2009 5:24 pm

So what good is the liability shield for?


 
 
Jan 22, 2009 5:52 pm

I was talking to a client of mine and he is dentist and mention he carries malpractice insurance plus another liability insurance...

 
Is that possible in the financial world and is it necessary..
 
I figured as long as I am not retarded, the E/O and LLC should be just fine..
Jan 22, 2009 7:50 pm

In addition to an S-Corp and E&O, I carry a $2 million personal umbrella policy to protect me from liability outside of the work environment (ie, someone tresspasses on my property with their 4-wheeler, gets hurt and sues me because they think I have money).  That's an example where the umbrella will kick in.  You may never be fully protected, but if you operate under a legitimate corporate umbrella, carry appropriate insurance and act with some common sense, that's all you can do.