S-Corp vs. LLC

**ltn1dr** · 07-20-2006, 06:15 PM

Quote:

Originally Posted by Atomm

If you believe the benefit of forming an LLC or S-Corp is the ability to avoid "double taxation", then you really need to do some research. There is a reason people ***** about the rich getting rich and the poor getting poorer. The truth of the matter is the rich own corporations and pay very little taxes. The reason they pay very little taxes is because they understand how a corporation really works.

Let me give you an example.

To make this easier to understand, let's set a few simple estimates.

Social Security Tax - 7.5%
Self Employment Tax - 7.5%
Federal Income Tax - 25%
State Income Tax 5%
Total Taxes 45%

Joe Shmoe Sr. owns Shmoe LLC. He is paid $100,000 from the business.

$100 x 7.5% Social Security Tax = $7500.00
$100 x 7.5% Self Employment Tax = $7500.00
$100 x 25% Federal Income Tax = $25000.00
$100 x 5% State Income Tax = $5000.00
Total Taxes = $45,000.00
Net Income = $55,000.00

Joe Shmoe Jr. owns Shmoe Incorporated, a C-Corp. He is paid $100,000 from the business.

$100 x 7.5% Social Security Tax = $7500.00
$100 x 7.5% Self Employment Tax = $7500.00 - Joe Jr. Doesn't Pay this. His corporation does.
$100 x 25% Federal Income Tax = $25000.00
$100 x 5% State Income Tax = $5000.00
Total Taxes = $37,500.00
Net Profit = $62,500.00

So, you tell me who is actually making more money? Whats that you say? The corporation is paying $7500.00 above and beyond the $100,000. Yes, they are, but it is a Tax Write Off for the corporation. The cost of doing business. That same $7500.00 is a Tax Burden for the LLC.

But wait, you said corporations are double taxed, right? Guess what? They are not taxed on Gross Profits, only Net Profits. At the end of the fiscal year, if your Corporation is going to make a huge net profit, then you can give yourself a bonus and lower that amount to next to nothing. Sure, you pay the taxes on it, but you automaticly gain 7.5% right off the top.

Please keep in mind, I simplified this concept. It is a little more complicated than I presented, but the fact remains a C-Corp can actually increase your own Net Income.

Yeah, I totally forgot that you have to pay yourself and your associates a nice hearty salary

**r415977** · 07-24-2006, 12:51 AM

If you are making enough money to have to worry about this, then it is definitely worth the time to at least meet with a CPA or Attorney for a free consultation. It can save you lots of time and money down the road.

One tip - You can set up an LLC and have it taxed like an S-Corporation. That way, you can save on self-employment taxes, yet have minimal paperwork worries. Again, ask a small-biz pro and they will tell you more.

**imported_Alexis** · 07-24-2006, 11:15 PM

Atomm - I'm a little confused. Let's assume that both the C corp and LLC starts off with $100K in earnings and the C corporation plans on distributing all earnings as a salary. After paying the FICA taxes, wouldn't the C corporation only have $92,500 to distribute (C corporations share of employment taxes FICA)? So you wouldn't have to compare C corp distributing $92,500 and LLC distributing $100,000.

You also don't mention FUTA - which would also decrease what is actually distributed by the C corporation.

Also, on salaries paid (guaranteed payments) by an LLC, I believe you don't have to pay unemployment taxes (SUTA). Can anyone confirm this?

Alexis
http://www.AmericanInventorSpot.com

**imported_Alexis** · 07-24-2006, 11:20 PM

An afterthought to my comment above ... even thought an LLC member pays all of SECA (in Atomm's example 15%). But isn't half of the SECA deductible by the LLC member on its individual tax return? So that also brings the after tax numbers of a C corp and LLC a lot closer.

Ok - I'll stop talking about this now. My head hurts.

Alexis
http://www.AmericanInventorSpot.com

**james2** · 07-24-2006, 11:24 PM

The advice in this thread should not even be followed. Some of the posts are not truthful.

The rich don't pay taxes? Hardly true. Tiger Woods pays millions in taxes, as does Bill Gates.

You want to know something else? There is an ethical thing to do and the ethical thing to do is pay taxes. Millions have died so this country, the USA, could become the premier business country in the world. No other country has so many corporations.

**Frito Pie** · 07-27-2006, 04:38 PM

How old is Joe Shmoe Sr. who owns Shmoe LLC and who is paid $100,000 from the business?

Is he married?

**marketjunction** · 07-27-2006, 05:02 PM

The majority of income tax is paid by the wealthy. That's why it's called a progressive tax.

That's also why when there is an IRS tax cut, people complain that the cut was for the wealthy people in the country.

Taxes help pay for roads, schools, utilities, defense, air travel, train travel, sports venues, food, housing and so forth.

**jmolenski** · 07-30-2006, 09:26 AM

another good source for info on how to decide what to do is dave ramsey... he's on am radio all over the country and on the web, podcastable... daveramseys.com

**FriedBob** · 07-30-2006, 11:34 AM

First off, I am not (yet) a CPA, but I am an accounting major and working towards both my CMA and CPA certifications. One thing that many states have is what is known as a "closely held" corporation. There are a number of restrictions to this type of corp, such as having less than 75 shareholders, but that may vary by state. The company that my fiancee and I started is a closely held corporation within the state of MO, and we have taken the subchapter S election. Under Missouri law, close corporations do not have to have the annual shareholder meetings or take minutes, but still enjoy the other benefits and protections of being a corporation.

Overall, my advice would be to talk to a lawyer and a CPA, but other than that, visit the website for the Secretary of State for the state in which you want to do business in. Sure, some of these other sites have useful information, but why not go directly to the source? The SoS will have the most up-to-date information, as well as being the most accurate and official. Still, no substitute for talking to a professional.

Standard disclaimers apply - this is not meant to be financial nor legal advice , nor am I a lawyer or a CPA (yet). There are pretty strict laws governing financial and legal advice.