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    6 Replies Latest reply on Feb 10, 2011 8:19 PM by Greg310

    LLC vs. S-Corp Tax Scenario


      I'm wrestling with forming my new venture in Ohio as:

      - An LLC

      - A S-Corp

      - An LLC treated as an S-Corp or tax purposes.


      I don't quite understand the tax implications and am hoping one/some of you can set me straight.  I'd like to do this by posing a scenario and getting your feedback.


      For simplicity's sale (yeah, right), let's assume that I form a 2-person Ohio company whose net profit for the year is $200k.


      LLC Scenario:

      If I form as an LLC (using default tax treatment), I think that each member (owner) reports $100k on the following April 15.  At that time, they EACH pay self-employment tax of 15.3% on the 1st $97,500 (or $14,917.50) and 2.9% on the remaining $2,500 (or $72.50).  That works out to $14,990. 


      What I don't understand is whether they each then ALSO PAY INCOME TAX (in the 28% bracket which is $82,400 - $171,850 for single-filers) on their $100k (or hopefully just the remaining $85,010).  I'm thinking that they must...otherwise an LLC is simply a great tool to reduce your income tax rate from 28% to 15%.  If they do also pay 28% on the remaining $85,010 ($100k - $14,990), that's another $23,802.80 in income tax.  That would bring the total fed tax bill to $38,792.80.  (If they had to pay 28% on the whole $100k, that would REALLY hurt, bringing the total tax rate to about 44-45% after state taxes.)


      I'm also guessing that each of them must also pay State Unemployment Taxes, etc. on that $100k and then state income tax on the $100k.


      So between Fed and State taxes, the LLC scenario tax rate would run around 40%.



      S-Corp Scenario:

      Alternatively, if I form as an S-Corp, I could pay each owner-employee a salary of $100k.  Under that option, I think the 15.3% and 2.9% still get paid (they are just paid as "employer part" and "employee part".  So effectively $14,990 has been taken from the $100k of each employee.  All state payroll taxes are also deducted.


      I think (?) the difference would be that the most each would end up paying under this option would be 28%+ state items.  I'd think that works out to a tax rate 7-10% less than the 40% under the LLC option.  Obviously, for saving the 7-10% you must pay the price of many additional filings and recordkeeping.



      Am I out of my mind?  Is any/some/most/all of what I am thinking correct?  I appreciate the help.



        • LLC vs. S-Corp Tax Scenario
          ArcSine Scout

          You need to adjust your analysis in two respects:


          1) In the LLC scenario, each partner only deducts half of his/her self-employment tax in figuring the amount of income subject to income tax. Using your numbers, a partner paying 14,990 in SE tax on 100K of LLC income, would deduct 7,495 from the 100K, and then pay income tax (federal and state) on 92,505.


          2) Income from an LLC is not subject to unemployment tax, whereas the S-corp salaries are. Thus in your analysis, shift the unemployment tax burden from the LLC scenario to the S-corp scenario.


          When you re-run your numbers you'll find that at the end of the day, the only real diff in the two alternatives is that the LLC scenario comes out ahead by the amount of the unemployment tax.


          Hope that helps a bit. Good luck!

            • LLC vs. S-Corp Tax Scenario
              mister.jack Newbie

              There's an additional potential for tax savings with the s-corp if you pay yourself a salary.  Suppose the net profit is $200k / yr, and the market rate salary (as you determine consistent with IRS guidelines) for your position is $80k annually (x2).  Then in your s-corp scenario payroll taxes would only be paid on $160k, saving roughly 6k (40k * 15%).  The remaining 20k x2 can be taken as an annual distribution that is subject to income tax but not payroll taxes. 

            • LLC vs. S-Corp Tax Scenario
              PiperE Wayfarer

              Spend some money and pose these questins to both a CPA who specializes in working with businesses AND speak to an attorney who specializes in setting up corps and LLCs. It is amazing what you will find out, especially from the attorney. The good ones know this stuff inside and out and it is worth setting up the right entity in the first place.


              Good luck

              • LLC vs. S-Corp Tax Scenario

                Thanks guys.


                My CPA convinced me that LLC is the way to go. 


                Not paying us a salary, paying as a draw, avoids payroll taxes (state & Fed unemployment and workers comp), while the 15.3% social security/medicare is going to be paid either way (one way spit between company and individual paying and the other both paid by individual...but either way it comes out of the amount available to us as net pay).  There is also a small advantage from a LLC in terms of record-keeping.  Finally, LLC offers much more flexibility in profit distribution if one of us ever takes a lesser (or greater) role than we now anticipate and thus deserves less/more of the profit.  (In other words, with an S-Corp the only way to adjust the profit distribution is to adjust the amount of stock owned by each person.)

                • LLC vs. S-Corp Tax Scenario

                  Hi sounds like you know a lot more about this than I do. It also sounds like you must have quite a bit of money or good backing. If the above is true, then find a good business attorney, tax attorney and let them handle it. However if the above is the wrong assumption,  I have been a sole proprietor for 40 years and I keep it simple, No real assets, neve had over a dozen employees and of course never got rich. or even close to it. I have at least 3 million aries in my family. They work 7 days a week to make it and another 7 days a week to keep it. This is a quote from one of them. (When I make this much money, I don't worry about every buck, thats just the cost of doing business)  I justhad to respond to that beautiful presentation you made. Good Luck