S-Corp vs. LLC (again)

AffApprentice

AffApprentice

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Nov 19, 2009
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I posted on this a couple months back, but now that it's getting close to the time to pull the trigger I have to dredge it up again. I went to my local SBA (Small Business Administration) office for advice on the merits of individual proprietorship vs. LLC vs. S-Corp.

I went in feeling pretty sure that I was going to go with an S-Corp based on the advice I received in this forum, but the counselor said the tax benefits are minimal, and that the personal liability protection is the same as an LLC. So now I'm not sure it's worth the hassle, given that I'll have to pay a bunch of fees and (probably) have a more complicated tax return.

Can anyone who's gone through this advise? Assuming I make $150-200k profit this year, will the tax benefits (if there are any) be worth it compared to an LLC? If anyone knows a good online resource for this stuff, that'd be really helpful too.

Thanks, WF crew.
 


Here's how it generally works (numbers are somewhat off and I'm not an accountant but this is the gist of it):

An LLC taxed as a sole-proprietor pays state, federal, and FICA/Self-Employment tax. The FICA is ~ 15.3% up to around 102K, then you pay a small percentage (~2% on the rest).

With the S-Corp you can split your income around 50/50 (salary/dividends). So you're paying all of the above on say 100K but on the other 100K you wouldn't pay FICA.

Based on the numbers above you'd be saving around 15K - definitely worth it.

Again, not a CPA and my numbers could be way off... but still, that's the gist of it.
 
There are subtle differences that only really start to reveal themselves once you start to bank.

Right now start an LLC. If you start to make a lot of money, go see a local tax professional and see if an S-corp is worth creating.
 
Well I recently switched to an scorp after learning I paid an extra $8k in taxes last year that I could have saved. Probably not much for a lot here, but when that is like 8% of my income, yeah I was pretty pissed. Needless to say I am now an LLC taxed as an scorp.
 
I just filed the paperwork to switch from an LLC to an S-Corp. With an S-Corp, you don't have to pay self-employment tax which saved me about 17k.
 
Here is my take, not an accountant but play one on TV:

S-Corp - 3-5K in fees for setup I think? Tax savings are 15% of 30K (paying yourself 70K in salary) so 4.5K, plus about 2.9K (2.9%) on the other 100K profit so about 7.4K total on 200K income. You are saving about 2.5-4K net, but there is a hassle factor to setting it all up with payroll, forms, etc.

In addition the 70K you pay yourself probably includes a bunch of other BS taxes from you state, which you dont have to deal with when you have an LLC and dont do a real payroll.

The LLC has min fees. Bottom line is if you think you will generate more than 200K going forward consistently, do the s-corp. If you think you will be around or less than 200K, it's a pretty close call. I would be careful about your salary and not make it too small if end up doing s-corp.

Another big variable is the state you are living in, for example in NH there is no state income tax (payroll) but 8%+ tax on corp profits. The state tax stuff might be the deciding factor for you.

Good luck.
 
Something no one is mentioning that I do is actually being an LLC but being treated as an scorp for taxation purposes. Many states (including Indiana where I live) they are actually half-way up to date on this technology shit and you can file for an LLC/Scorp/Ccorp right on the secretary of state's website.
 
flipper said:
S-Corp - 3-5K in fees for setup I think?
Click to expand...

that is wrong... i mean $700 is at the high end... I live in ny..

@op

you need to talk to a CPA not just any fool who says they are an accountant

it may cost you money... but if you are making 200 - 300k a year what is 450 - 1k for a CPA that will save you 15 - 20k?
 
"I would be careful about your salary and not make it too small if end up doing s-corp."

This. Setting up an S-Corp doesn't save you any tax in and of itself. The benefit is the ability to claim less than 100% of your income as self-employment income (subject to the 15.3% self employment tax as noted above). You'd claim some % as a salary (subject to self employment tax) and take the remainder as a distribution (not subject to self employment tax).

However, the IRS is well aware of this and if you're audited, they will look to see if you have paid yourself a "reasonable salary". This isn't defined by the IRS and if you're the only employee it will be up to you to prove that the reasonable salary for you in your one person business isn't 100% of your income. This is generally tough to do since you're the one doing all the work.

LLCs are a creation of the states; the IRS disregards them for income tax filing purposes. As a single member LLC you'll file a Schedule C on your 1040 to report your business activity the same as a non-LLC sole proprietor. LLCs give you some liability protection but no tax benefits.
 
also if you are the only person at an llc... you really dont get free reign to break the law (ftc) and claim bankruptcy... they will still come after you personally

so dont think that
 
Ease of use w. protection, form an LLC.. if you trying to make sure you put some money in your pocket ( since you mentioned that with s-corp ), just do an LLC in a tax free state.

I live in a state with 6% tax on my earning.. so I have to give away 6% each year. Instead of hitting my head on the wall trying to decide if I should have done s-Corp and take dividends and shit, Im just forming another LLC in a tax free state for my income and putting that 6% in my pocket.

Nuff said.

If you really wanna thread on water because you think s-corp can save you money paying yourself dividends ( which can be audited ), then go all out and form an IBC or some company in Panama and run your money thru that. ( being sarcastic here ). I mean, if you gonna go, then go big. Dont get audited and fined over some small shit like dividend payments and shit.. might as well get the 2nd passport and bank account and citizenship in Dom Rep and run money thru it. heh

Otherwise, do the LLC in a tax free state and be better off then a lot of other business that are running in taxed states.

If your already in a tax free earning state, then you might look at the s-corp to save a little more, but i dont think it worth it.
 
jsphfcll said:
also if you are the only person at an llc... you really dont get free reign to break the law (ftc) and claim bankruptcy... they will still come after you personally

so dont think that
Click to expand...

Actually this is a bit hard to do in a lot of biz setups, not just llc setups.. if your breaking the law free reign style, no legal setup is protected in regards to a business your running.
 
gimmedat said:
I just filed the paperwork to switch from an LLC to an S-Corp. With an S-Corp, you don't have to pay self-employment tax which saved me about 17k.
Click to expand...

But you have to pay yourself a reasonable salary as a W2 employee... If you pay yourself 100k or so you have to pay the FICA on that income on your side as well as the S-Corp has to pay some, which totals to pretty much the same as SEP tax.

Did you save 17k by paying yourself no salary and taking it all in a dividend or something?
 
volknet said:
I wrote this post a while back when I was researching everything:
Best Corporate Structure for Affiliates

Might help. Some really insightful comments on it too.
Click to expand...

Here is a great example I saw while researching. I couldn't find it again so this is from memory.
There was a lawyer who through his S corporation made $26,400,000 in one year. Through the S Corp, the lawyer was paid an annual salary of $400,000. At the end of the year, the remaining $26 million was paid as a dividend. This means that instead of paying the 15.3% self employment tax on the entire $26,400,000 he paid the extra 15.3% on the $400,000. Doing this saved him over $750,000 in taxes! The $750,000 may not sound like much in comparison to 26 million but that's 3 quarters of a million dollars saved!
Click to expand...


You only pay SEP tax or FICA on your first ~104k in income after that it drops to ~3%. That's where all the savings came from in the example you read. You don't have to pay that ~3% on the dividend you pay to yourself.

So the savings with an S-Corp come in 3 main forms for most people.

The lack of paying that 3% on the dividend like you would have to pay on salary past 104k or LLC money.

Being able to take a salary below 100k if you made less then 250k total in the business and paying 15.3% on less then 104k of your income.

Health insurance premium is deductible for the S-Corp if it's buying health insurance for you. There are a few others but for anyone with a family that wants good coverage this will be a large enough expense that the tax savings will be noticeable.

I'd be really curious to have some one explain to me where a ton of other savings come from in a S-Corp vs LLC.
 
Thanks for all the responses, guys!

I think my course of action for now is:

1. Assume I'll make no more than $200k this year (seems reasonable).
2. Form the LLC for personal liability purposes.
3. If / when I start making $200k+, consult with a CPA and see how to minimize burden.

I live in California by the way, so I'm pretty sure I get fucked on state taxes no matter what I do (damn guvment).
 
Everyone generally says "form an LLC for personal liability purposes"... But seriously, as an affiliate -- who is going to sue you and what is really your personal liability an LLC will protect you from??? You put your expenses on credit cards - you've got to pay those... If you break the law (trademark, copyright, libel/slander, etc, etc, etc) then they will go after YOU and your LLC will not protect you for squat. So what does everybody think the LLC will protect them from and can anyone give an example of where an affiliate was sued and the LLC actually helped them avoid bankruptcy or whatever.... I think it's one of those things that everyone says, "set up an LLC for your liability, dude..." but no one really understands what their liability is and how an LLC can or cannot protect you... If anyone can explain how an LLC can REALLY protect you (versus a sole prop) I'd love to hear it.......
 
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