I currently have an LLC with 2 members. We’re debating on whether or not to eventually change the corporate structure to an S-Corp for tax reasons. But I’m not really clear on the advantage.
I’ve read in some places that I (as owner/major shareholder) would not have to pay self-employment taxes with an S-Corp (or possibly a “subchapter” s-corp). But in that case, wouldn’t I have to pay the same amt. in corporate taxes? I’m assuming someone, somewhere, has to pay those taxes. Anyone have a good primer on the tax (specifically self-employment tax) benefits of S-Corp vs. LLC?
I believe with an S-Corp all profits are split between the shareholders and reported on their individual tax returns (Schedule E). So, there are essentially NO corporate taxes for S-Corps. Although, you would still have to pay income tax and social security tax on any salary you draw from an S-Corp.
Every situation is different, the optimal tax entity for you will depend on the complexity of the financial and legal aspects of your business.
I have an S-Corp but I am the sole owner and only employee. I have to pay myself a “reasonable salary” and I have to pay Fed, State, State Disability Insurance and Social Security on that part. SS tax is around 15%, half of that is paid by the employee and half by the company. Any profit after salary and expenses is still taxed by the Feds and the State but SS and SDI are not paid on that portion. The trick is to pay yourself as low a salary as won’t get you into trouble so as to avoid the extra tax.
For very small companies, there is generally no effective difference between an S-Corp and an LLC but your specific case may be an exception to this rule. Spending a little time with a CPA and a business lawyer is time and money well spent. You can write it off as a business expense!
My wife and I are the sole owners of an S-Corp (interchangable name with Subchapter S Corporation), and I am pretty much in agreement with Haj on the “passthrough” of profit/loss on to your personal taxes.
I’m not totally informed on LLC’s, but S Corps help shield personal property of each owner from collectors, judgements, etc that are done against the company. This is also know as the “Corporate Veil”. Follow the coporate laws to (annual shareholder’s and/or corp. director’s meetings, K-1 statement reporting, etc.) to keep the Corporate Veil intact. LLC’s might be similar in nature, but I’m not totally sure.
There are differences in capital reinvestment, real estate holdings, etc…but I think you should go to the link and follow up on that: Sub S Corp versus LLC Googled.
In re-reading it, maybe I am misunderstanding how corporate taxes are defined but I’m fairly certain that I have to pay corporate taxes. I haven’t gotten my returns back from my CPA yet so I can’t check.
OK, no problem, as far as I know all the S-Corp earnings are “passed through” to the shareholders via Schedule E on their individual returns. But like you say, you avoid payroll taxes by allowing as much S-Corp income to pass through this way rather than take a large salary. I’m not sure what mix of salary vs S-Corp earnings would raise a red flag with the IRS, sometimes a CPA will know what mix is acceptable.
I had a couple of S Corporations for many years. My CPA’s advice was to keep what we paid ourselves in salary and what we took as stockholder distributions about equal. You do save on payroll tax that way, as opposed to taking it all as salary.
S Corporations are not subject to the corporate income tax, but they do pay payroll taxes (if they’re smart - I think ignoring or getting behind on payroll taxes is one of the bigger killers of small corporations).
We we’re, in my state (Texas), potentially liable for a state corporate Franchise tax. And get right with your state controller if you need to be collecting sales tax.
Ah. So the trick here is, income that a shareholder earns from a company in which they invest is STILL subject to state and Federal income tax (like payroll would be), but not to things like Social Security or state disability insurance?
Just so you know, you are getting a lot of 90% correct advice here, but not on the question you are asking. You are getting the standard advice on pass through tax treatment status for both types of entities, and corporate shield status for non-partnership/sole proprietorship entities (though they are taxed as a partnership in many ways).
The question I think you were asking pretty clearly, stated differently by me here, is one I commonly hear. What are the real differences between an S-Corporation and an LLC, particularly in terms of tax treatment.
Stated generally, LLCs suffer disadvantages in that your earnings are generally subject to self-employment tax, and it is more difficult to categorize earnings as anything other than wages (which leads to FICA/FUTA withholding pain). Therefore, for a lot of single/two/three member entities like the one you are describing, you will often see an S-Corporation over an LLC.
Of course there are major governance and structuring differences between an LLC and S-Corporation as well, including the ability to allocate income among members/shareholders.
Of course, you should seek the help of an accountant and attorney for this matter, as I am not your attorney or accountant, am not agreeing to represent you in any capacity, am not a tax specialist, and do not know or want to know the full facts behind your situation, which would be necessary to give any adequate legal or accounting advice.