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    2 Replies Latest reply on Mar 5, 2010 5:23 PM by alytus

    Entity Classification Election: Corp vs Disregarded Entity

    CollabSoft Newbie
      I am trying to decide whether it would be better to treat my newly formed Single Member LLC (SMLLC) as a pass-through entity (disregarded entity) or a corporation for tax purposes. The pass-through option requires me to pay self employment taxes (Social Security, Unemployment, Medicare) at a rate if 15.3% of retained earnings. The corp option allows me to avoid lots of the self-employment tax by distributing much of the profits as bonus checks or owners elections. However those funds are paid after the LLC paid taxes on the profit and will be taxed again on my person W2 - hence double taxation. So the question are : Which is worse: Self-Employment tax or Double-taxation ? How does one decide? Is there a simple calculation based on projected proft that I can do?
        • Re: Entity Classification Election: Corp vs Disregarded Entity
          dublincpa Scout
          SE Tax on the Sole Prop or Partnership taxed LLCs is based on taxable income whether on not it is retained. Guaranteed payments to a partner in a partnership reduces other partners' SE income, but increase the recipient's SE income.

          S Corp employee-shareholders get W-2 wages that are taxed for FICA (nearly identical to SE Tax) and may tax distributions. However all taxable income of the S Corp is taxed to the shareholders for ordinary income, but not SE or FICA. S Corp normally pays no corp income tax. No double taxation.

          C Corp employee-shareholders get W-2 wages that are taxed for FICA. C Corp pays tax on all taxable income whether or not retained or paid as dividends. Dividends are taxed to shareholders at a lower than ordinary rate currently. This is where the double tax comes in. Amounts that are bonused out as W-2 wages reduce corp income. So, they are only taxed to the shareholder.

          You really need help from a pro that understands and can apply their knowledge to your specific needs.

          Circular 230 Disclaimer: Basically, you can't use this advice as a defense for anything that goes wrong with your situation.
          • Re: Entity Classification Election: Corp vs Disregarded Entity
            alytus Scout
            too complex for me, i'll be watching for more advice