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Level 1

Need Advice for LLC. C Corp ir S Corp

I started up my LLC in may of last year. For nie I am a single member LLC. I choose to operate as a sole proprietor for remaining 2018 and plane to file a schedule C along with my previous employment w2s. Now the new year has started not sure on how to request from the IRS as to operating or neungntaxed as a C Corp or S Corp or stay as a sole proprietor. I kinda understand each choice but it's still unclear as to which would be the most beneficial to,do? It's just me for now but looking into bringing some help on board , however was going to provide the help a 1099 as they would be subbing out the work from me. I am in the service repairs trade any info would be appreciated. 

9 Comments
Highlighted
Level 15

Need Advice for LLC. C Corp ir S Corp

If you change to a c- or s-corp, you will have to start up payroll for yourself plus any future hires.  Electing to be a corporation means you are expected by the IRS to pay yourself a salary commensurate with others in your industry for your position.  As well as employer match with salary do not forget to add in the outside cost for payroll services unless you plan doing it all manually.

Corporations have restrictions on how you can take money out of the corporation, what you would think of as owner draw on equity does not exist in a corporation.

The state registration of LLC, gives you the legal protection that an s-corp does, which used to be one of the main reasons to go with s-corp.

You can not take on help as a 1099 contractor as you say, if they work for the company the way an employee would. see the attachment as to what a 1099 contractor is.

A c-corporation pays taxes, and then pays out dividends that are taxable to the person receiving them.
An s-corp does not pay taxes, but the taxable profit is passed to the shareholders, much like now the taxable profit is passed to the sole proprietor owner.

I am sure others will chime in with more differences, but to me those are the main ones.

Highlighted
Level 10

Need Advice for LLC. C Corp ir S Corp

IMO the main reason to operate as an S corp is that you don't have to pay employer payroll tax (SS + Medicare + UI), about 10%, on any excess of profit above a reasonable salary. This is especially important for an investor.  If you view your business as an investment, then it may be beneficial. Say the business makes 200k profit and a reasonable salary for the work you do is 50k, then the excess 150 k will not be subject to payroll tax. SS is capped at about 120k. I am not sure how they decide what a reasonable salary is. I am not sure if the excess is subject to ordinary income tax or capital gains tax. 

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Level 15

Need Advice for LLC. C Corp ir S Corp

For this: "I am not sure how they decide what a reasonable salary is."

I have referred you a number of times to "rcreports.com" because you can read there about Reasonable Compensation, including what does not work. Taking $50k as wages and $120 as distribution is probably going to be examined by the IRS. rcreports.com has the case history and the laws for this, that you can review.

 

For this: "I am not sure if the excess is subject to ordinary income tax or capital gains tax."

 

You get a K-1 from your Corporate or partnership return (1065 or 1120S) and this is what you report as regular Income subject to income taxes, but not as earned Wages. It is "earned income" for purposes of, for instance, retirement contributions. (Edited - C Corp issues dividends and that is reported on 1099Div which will include various fields for reporting return of capital, reportable gains of loss, etc.).

 

No one on the QB user forum can help you determine what legal and tax entity type best meets your needs. You seem to need to hire employees, and under any Corporate structure, you also become an employee of the corporation. Some entity types should be avoided for some business operations. Example: An S Corp is not a good choice for owning Real Property.

 

Please see your own CPA.

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Level 15

Need Advice for LLC. C Corp ir S Corp

@qbteachmt

 

You get a K-1 from your Corporate or partnership return (1065, 1120 or 1120S)

 

opps, typo, form 1120 does not issue a form K-1

Highlighted
Level 10

Need Advice for LLC. C Corp ir S Corp


@qbteachmt wrote:

 

 

this is what you report as regular Income subject to income taxes, .


Some investment income is subject to the lower capital gains tax. For example qualified dividends, which is most dividends; those paid by US corporations where the holding period has been met.  I know that S-corps do not pay dividends, but it seems to me the principle is the same

 

 


@qbteachmt wrote:

Taking $50k as wages and $120 as distribution is probably going to be examined by the IRS. 

 

 


Not sure why you think those particular amounts may be examined, when you have no idea the nature of the work or how many hours are worked in my hypothetical example

Highlighted
Level 15

Need Advice for LLC. C Corp ir S Corp

"I know that S-corps do not pay dividends, but it seems to me the principle is the same"

 

Well, it's not the same in the tax code. The Pass Through Entity means that anything you take from the S Corp is Distributed from Equity = simply taking entity earnings, and Not taking them doesn't change what you would report for income from the K-1. Also, taking them is not Expense, but from Equity. You can understand how this is Different than a dividend if you think of it like this: The available funds from the Profitability of the S Corp or Sole Proprietorship can be taken or not, but the performance of the entity still is reported for purposes of tax filing. If you take some, that is considered part of This Year's Net, and since it is not expense, it doesn't change that Net. If you take More than this year's net increase, you are considered to have taken prior year, or Retained Earnings (amounts already reported and taxed). That helps you understand why the Taking, is not the taxable or reported event. It's only if you take more than you earned the right to, and more than your initial equity invested, that you have taken something not yours = taxable to you because of that taking. example: for the year, the entity starts without any equity, takes a $5,000 loan, and you take it as Distribution = income to you. This is a Simplistic explanation, of course, for purposes of this example. Notice how none of this is P&L = not expense. The loan increases liability and the taking of the funds reduces Asset.

 

Thanks, I corrected that list of tax forms in the previous message.

 

"Not sure why you think those particular amounts may be examined, when you have no idea the nature of the work or how many hours are worked in my hypothetical example"

 

I keep pointing out that you don't need Hypotheticals. Go to RCReports.com and Read about the actual cases there. I also recommended previously that you take one (or more) of the Webinars or watch their recordings. It seems you want to be informed, based on your input on the forums, but you keep working off of "it seems to me" and there is no substitute for Being Informed, not surmising from circumstances.

 

 

Highlighted
Level 1

Need Advice for LLC. C Corp ir S Corp

can you clarify on this: as just llc if the company was sued (heavens forbid) that my personal assets are also at risk but If i am llc with s-corp election my personal assets are protected in a law suit and only business assets effected.   im getting conflicting answers from different tax ppl

Highlighted
Level 15

Need Advice for LLC. C Corp ir S Corp

@jackpotconcrete

 

"im getting conflicting answers from different tax ppl"

 

Because you need to ask a Lawyer. That isn't a tax question. That is a Legal question.

Highlighted
Level 15

Need Advice for LLC. C Corp ir S Corp


@jackpotconcrete wrote:

can you clarify on this: as just llc if the company was sued (heavens forbid) that my personal assets are also at risk but If i am llc with s-corp election my personal assets are protected in a law suit and only business assets effected.   im getting conflicting answers from different tax ppl


LLC protects your personal assets in a law suit that goes against the business, baring negligence, etc

does not matter if the LLC is a sole proprietor, a partnership, or an s-corp

 

S-corp has the same personal asset protection

adding LLC registration to an s-corp does nothing additional for protection

 

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