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Mike43
January 6, 2019

Need Advice for LLC. C Corp ir S Corp

  • January 6, 2019
  • 2 replies
  • 0 views

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. 

    2 replies

    Rustler
    Rustler
    January 6, 2019

    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.

    J
    jackpotconcrete
    January 31, 2019

    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

    qbteachmt
    qbteachmt
    January 31, 2019

    @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.

    M
    Malcolm Ziman
    January 6, 2019

    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. 

    qbteachmt
    qbteachmt
    January 7, 2019

    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.

    Rustler
    Rustler
    January 7, 2019

    @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

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