S-Corp vs. LLC

**ltn1dr** · 07-06-2006, 02:20 PM

In my opinion, the best thing to do for a web business is become an LLC, not an S-Corp.

So if you're an S-Corp, why'd you chose that over an LLC?

S-Corp's are double taxed, have mandatory member meetings, stocks, minutes-keeping, and the rules are much stricter.

The only reason I'd think about filing a corp was if I planned to have insane amounts of expenses or things like that.

**miketheinternet** · 07-06-2006, 03:35 PM

There is no overall best answer to this question, and your point about an S-corp being double taxed is incorrect.

With an LLC you must pay self-employment tax on every dollar of net income plus personal income tax.

With an S-corp(not a C corp which is double taxed) you can have your accountant set up a situation where you are taking some of the profit as a salary for which payroll taxes are paid. However the advantage is you can also take income as a distribution where no self employment taxes are paid. In my situation, I saved a lot of money setting up this way. Yes there was more paperwork upfront, but once you get started it is a breeze

With either entity type I would strongly suggest establishing some type of retirement plan with tax benefits. For instance I established an SEP and am able to contribute up to 25% or 40,000 which ever is less to a SEP account which is tax deferred

**miketheinternet** · 07-06-2006, 03:50 PM

Quote:

Originally Posted by ltn1dr

The only reason I'd think about filing a corp was if I planned to have insane amounts of expenses or things like that.

Also expenses have nothing to do with s-corp vs llc

**ltn1dr** · 07-06-2006, 06:03 PM

oooo I hate it when I do that.

I meant C-Corp, I never even looked into opening an S-Corp.

**cpvr** · 07-11-2006, 03:33 PM

Does anyone have any more knowledge about this?

**pcdoc** · 07-11-2006, 04:06 PM

Actually, with the lower taxation on C corp dividends the LLC / S / C election became more complex.

It depends on your current level of income and the profitability of your corporation, the number of shareholders, their income, etc. etc.

Buy a few hours from a CPA.

**xboxundone** · 07-11-2006, 04:09 PM

the best route is to talk with a CPA as every situation is different!

**ltn1dr** · 07-11-2006, 08:11 PM

Quote:

Originally Posted by pcdoc

Actually, with the lower taxation on C corp dividends the LLC / S / C election became more complex.

It depends on your current level of income and the profitability of your corporation, the number of shareholders, their income, etc. etc.

Buy a few hours from a CPA.

Meh, I never like spending money when the information is free online.

There thousands of sites with information on this and the differences and how to choose.

**Atomm** · 07-11-2006, 11:54 PM

LLC's are also subject to "mandatory member meetings, stocks, minutes-keeping, etc"

To maintain a LLC, you still must do business in a corporate fashion. If you do not, then you can loose the Veil Of Corporate protection.

If you really want to know, do yourself a favor and get the Audiobook, Rich Dad, Poor Dad's: Own Your On Corporation. It's $13 and it does a great job of outlining the differences so you can at least have a reasonable and informed conversation with a CPA or Lawyer.

**xboxundone** · 07-12-2006, 08:40 AM

Quote:

Originally Posted by Atomm

LLC's are also subject to "mandatory member meetings, stocks, minutes-keeping, etc"

To maintain a LLC, you still must do business in a corporate fashion. If you do not, then you can loose the Veil Of Corporate protection.

If you really want to know, do yourself a favor and get the Audiobook, Rich Dad, Poor Dad's: Own Your On Corporation. It's $13 and it does a great job of outlining the differences so you can at least have a reasonable and informed conversation with a CPA or Lawyer.

Sorry but you are off a little bit as an LLC can be a sole proprietorship so no need for meeting minutes etc.... may want to do a little more research or talk with a CPA.. and one of the best resources it the IRS website

**Atomm** · 07-12-2006, 10:40 AM

Well, I did have a LLC and a CPA. I did have to keep minutes and have a charter. Maybe it was a state requirement, but if you are sued, how are you going to prove you are a seperate entity from the company if you don't have documentation?

One thing about a LLC according to the audiobook is it is a relatively new entity and the courts are still trying to decide how to treat it. Since there is little direction, the thought process is the courts will look towards corporate law to help give them direction. Again, never take it for granted that you can maintain a seperation if you can't prove it in a court of law.

I am not claiming to be an expert. I know what I had to personally do for my LLC. Everyone should make their own decisions based on the best information available.

**xboxundone** · 07-12-2006, 10:55 AM

Quote:

Originally Posted by Atomm

Well, I did have a LLC and a CPA. I did have to keep minutes and have a charter. Maybe it was a state requirement, but if you are sued, how are you going to prove you are a seperate entity from the company if you don't have documentation?

One thing about a LLC according to the audiobook is it is a relatively new entity and the courts are still trying to decide how to treat it. Since there is little direction, the thought process is the courts will look towards corporate law to help give them direction. Again, never take it for granted that you can maintain a seperation if you can't prove it in a court of law.

I am not claiming to be an expert. I know what I had to personally do for my LLC. Everyone should make their own decisions based on the best information available.

Yea maybe it is a state thing as always best to consult a CPA

Also one way to seperate is have seperate accounts and don't mingle accounts is the easiest way to keep personal seperate from business.

**chihpih** · 07-12-2006, 11:13 AM

when i incorporated i picked s-corp over llc for the tax savings that you receive when not having to pay self employment taxes. goto www.corporate.com and they have explanation of each type of entity and pick what is best for you.

**xboxundone** · 07-12-2006, 11:27 AM

Quote:

Originally Posted by chihpih

when i incorporated i picked s-corp over llc for the tax savings that you receive when not having to pay self employment taxes. goto www.corporate.com and they have explanation of each type of entity and pick what is best for you.

But is it your full time job? as i considered going S-corp but websites aren't my full time job...

**xboxundone** · 07-12-2006, 11:32 AM

here are a few good tidbits on LLC and S-corps...

Both S Corporations and LLCs allow owners to avoid "double taxation" and to pay income taxes on a flow-through basis like sole proprietors and partners. However, LLC's are quickly becoming a preferred entity among small business. Here are some key examples of the benefits of an LLC verses an S Corporation:

An LLC is simpler and faster to form. It may be formed in one step, while an S Corporation election can only be made after a General Corporation is formed first.
An LLC is not required to hold annual meetings or to keep formal minutes, while an S Corporation is required to do so.
LLC members can split profits/losses in any way they choose. In an S Corporation, shareholders must receive dividends according to the number of shares that they own, regardless of the amount of effort put into the business.
An LLC can be owned by any combination of individuals or business entities. Only United States citizens and resident aliens may own an S Corporation .Other entities generally may not own an S Corporation.

While many business owners are enjoying the simplicity and flexibility of the LLC, it may not be the best choice in every case:

If you are professionally licensed and live in California, you may not be able to form an LLC. Live in California? Read more about the specifics of a California LLC.
Enticing or compensating employees with stock options or stock bonuses requires forming a corporation since LLC's do not issue stock.
S Corporation shareholders pay Medicare and Social Security tax only on money received as wages or salary, but not on profits received as dividends or that stay within the company. Under certain conditions, LLC members may need to pay Social Security and Medicare taxes on the entire amount of LLC profits. In particular, LLC's that provide professional services such as health, law or engineering should consult a tax advisor on this issue.

**Atomm** · 07-12-2006, 11:35 AM

I would add that California has a $800/year LLC fee where as Nevada has a $50/year LLC fee.

**Zen** · 07-12-2006, 04:17 PM

The LLC statutes may differ between jurisdictions.

I think the bottom line here is clear... talk to a professional about financial planning!

**Libertate** · 07-19-2006, 10:39 PM

We haven't mentioned LLP or Limited Liability Partnerships.

I have formed those to provide me the benefits of LLC but not the required Corp structure, and no Corporate fees such as mentioned above for California and Nevada. LLPs are of course treated differently in every US state (and country).

**Atomm** · 07-19-2006, 10:53 PM

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.

**beley** · 07-20-2006, 01:43 PM

As a C-Corp you can save a lot of money on taxes if you make enough money. Most people don't make near enough money to offset the costs of running a corporation.

I currently run as an LLC, and will form a C-Corp when we have enough revenues and pay enough taxes that it's worth it. That's what a good CPA is for... they can tell you exactlly how much you will spend as a C-Corp, S-Corp or LLC in a given year and you can decide which is best for your company.

If your revenues keep increasing then a C-Corp is definitely in your future. I don't know too many people who still run as an S-Corp or LLC with over $1M in revenues.