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    19 Replies Latest reply on Jul 17, 2008 1:39 PM by viahraj

    Right form of entity - S-Corp. vs. LLC

    Manoj Gupta Adventurer
      In most cases for small businesses, S-Corp. is better than LLC. In case of LLC, 100% of net income is subject to self employment taxes (15.30%) while in case of S-Corp., the income subject to self employment tax is typically 30-50% of net income. I have illustrated this and the tax saving impact, on my website with the help of an example. Please see "FREE DOWNLOADS" page on my web site www.GlobalAccountingAssociates.com and download the excel file, review and give me your feedback, if any.
        • Re: Right form of entity - S-Corp. vs. LLC
          Lighthouse24 Ranger

          No question that an S-Corp can reduce unemployment taxes, however it may not be the "right" structure for several reasons: (1) An S-Corp has no flexibility in how profits are split among owners. The profits must be distributed according to the ratio of stock ownership, even if the owners agree it would be more equitable to distribute the profits differently; (2) The IRS is very careful to check whether a salary paid by an S-Corp is reasonable by industry standards -- and if they determine that the salary is too low and that earnings are being "hidden" as distributions, they are quick to penalize and reclassify the distributions as salary; (3) An S-Corp tax return is more complex and time-consuming than the simple pass-through LLC (and the problem is multiplied if the state also has a corporate income tax) -- so the additional cost of an accountant/tax expert or the time for an owner to do taxes himself (159 hours for an S-Corp versus 3 hours for an LLC, according to the IRS) could easily eat up all the employment tax savings for a business that has only modest earnings. New entrepreneurs have to think about ownership strategies, project their earnings, and run the numbers to decide what will be best for them.
          • Re: Right form of entity - S-Corp. vs. LLC
            Manoj Gupta Adventurer
            Thanks for the comments, Lighthouse. As I said LLC is better in "most" cases. Those situations that Lighthouse pointed out are very uncommon. Hence it is always better to use these forums to "prepare" yourself when you speak to a CPA but not make a dicision based on information received from such forums. Most CPAs including myself, charge the client same amount of fee, in fact, a litttle extra for LLC as form 1065 which is used for LLC is a little more complicated than the form 1120S which isused for S-Corp. One good example of a unique case when LLC is better than S-Corp. is in case of a real estate company owning real estate due to "debt basis" issue which has the potential to more than compensate the additional burden of "self employment tax". I have just uploadted some documents on my website' "free downloads" page related to LLC VS. S-Corp. that everyone can take advantage of. www.GlobalAccountingAssociates.com
              • Re: Right form of entity - S-Corp. vs. LLC
                Lighthouse24 Ranger
                1. The situations pointed out are not that "uncommon."
                2. An LLC only files a 1065 if it has two or more members and chooses to be taxed as a partnership -- which would be uncommon among my client base, and I think among most of the busines owners in this community. About 65 percent of LLCs have a single member/manager who elected to be disregarded as a separate filing entity, so earnings are passed through and shown on the personal tax return which is as simple as it gets. Most of the rest elected to be taxed as a corporation, which is also an option.

                I agree that an S-Corp can offer major advantages, but it has distinct disadvantages, too -- especially for the ultra-small one entrepreneur start-up.
                  • Re: Right form of entity - S-Corp. vs. LLC
                    sbuser Newbie
                    Hi,

                    I recently
                    started a new business, single-member LLC in Virginia. I did not know at that time that I could not be an employee of my own company. Now that I realized, I would like to elect my LLC to be taxed as an S-Corp mainly to save on the employment taxes. Is this a goog idea? If so, can I do this? If so, what is the eligibility criteria for this change?
                    I am not a US Citizen or a permanent resident.

                    Thanks
                    Jay
                      • Re: Right form of entity - S-Corp. vs. LLC
                        Lighthouse24 Ranger
                        Jay: Are you in the U.S. on an H-1B or other temporary visa? Do you have employees, or is this a one-person operation (just you)? When you formed your LLC in Virginia, did you designate that it was member-managed or manager-managed? I can offer better advice on whether I think an S-corp is a good idea and how you can do it with your answers to those questions. Thanks.
                          • Re: Right form of entity - S-Corp. vs. LLC
                            sbuser Newbie
                            I have EAD (Employment Authorization Document). I was on H1-B Visa before. I have been in the US for the last three years.
                            > Do you have employees, or is this a one-person operation (just you)?I have one employee living and working in Maryland. The employee started working this month. I am living and working in Virginia through my company.

                            > did you designate that it was member-managed or manager-managed?Chose the Member-managed option.

                            I started my business in Nov 07, but I did not have any transactions last year. One accountant I have been to, told me that I have to convert the single-member LLC to LLC partnership before it can be converted to an S-corp (i.e. elected to be taxed as
                            S-corp). Is that true?

                            Thanks
                            Jay

                             


                              • Re: Right form of entity - S-Corp. vs. LLC
                                Lighthouse24 Ranger

                                Jay, I don't know what an "LLC Partnership" is -- and if you're the sole owner, I don't know how you'd convert to any type of partnership structure anyway.

                                According to IRS instructions for form 2553, whether you are an LLC or a corporation, you can elect to be taxed as an S-Corp if you satisfy eight specific tests -- one of which is that the entity cannot have any nonresident alien shareholders. So provided you qualify as a resident alien for tax purposes (on the basis of "substantial presence" since you don't have a Green Card as yet), it seems like you would simply complete and file Form 2553 with the IRS to elect for your LLC to be taxed as an S-Corp, if desired. (Note: If you want it to take effect this tax year, you must file by March 17.)

                                I'm not an accountant or immigration attorney, so there may be other factors I'm not aware of -- but this is how it looks to me and I hope the information was helpful.
                      • Re: Right form of entity - S-Corp. vs. LLC
                        RBEnterprise Wayfarer
                        Is it a good idea to have a LLC own 3 other LLC. Or should i Make one a C Corp to own the other 3. And also can a LLC loan money to other LLC's.
                          • Re: Right form of entity - S-Corp. vs. LLC
                            dublincpa Scout
                            We will need a little more info than that. Where? What will the enitities be doing? How many owners? Will they all be profitable immediately or do you anticipate significant startup losses?

                            Some states also have Series LLCs that kind of work like corporate subsidiaries with some differences. If you will do business in multiple states, this may not be worth it. Most states do not recognize them except as a single LLC.
                              • Re: Right form of entity - S-Corp. vs. LLC
                                RBEnterprise Wayfarer
                                Well im going to be doing retail/entertainment/real estate. My enterprise is just the parent company of the other three that will be like divisions doing all of the work. I want the other 3 companies to take loans from the parent company so the parent company will holding all assets and the other 3 holds the debt. Im in iowa and i also plan on starting a non profit corp. I want to bring entertainment to iowa.(This is a thought i have not formed the LLC's yet but plan on doing so within the next week.)
                                  • Re: Right form of entity - S-Corp. vs. LLC
                                    dublincpa Scout
                                    If the real estate is rental real estate, you all but definitely don't want that to flow to any kind of corp, not even an S Corp. If it is a development or flipping business, that would be ok to flow to a corp or LLC.

                                    How profitable for tax and/or accounting purposes is each entity expected to be? What about positive cash flow? If there is a spouse in the picture and the businesses are independent enough, you could structure the ownership to maxime tax and employment benefits to the owner(s).
                                      • Re: Right form of entity - S-Corp. vs. LLC
                                        RBEnterprise Wayfarer
                                        How profitable for tax and/or accounting purposes is each entity expected to be? What about positive cash flow? If there is a spouse in the picture and the businesses are independent enough, you could structure the ownership to maxime tax and employment benefits to the owner(s).

                                         

                                        How could i structur the ownership to maximize the tax and employment benefits to the owners. The is going to be rental units and flipping going on, and the clothing company has a positive cash flow already because ive been doing that business for 2 years now. And yes there will be a spouse in the picture.
                                          • Re: Right form of entity - S-Corp. vs. LLC
                                            dublincpa Scout
                                            The answer depends entirely on how much is available for owner compensation and benefits and what proportion of it you want to use for tax deferred retirement and owner health benefits. Other employees always have to be included, but there are permitted disparities.

                                            Assuming the profitability and employee profiles of the businesses are different, you would make sure that one was spouse works for, owns and manages each entity. This includes being a director or officer.

                                            You would then set up the better benefits on the company that has the most favorable profile. It gets more detailed and more complicated from here, but your accountant can probably help you. Let me know if you or your accountant need more detailed directions on where to take this.
                                      • Re: Right form of entity - S-Corp. vs. LLC
                                        RBEnterprise Wayfarer
                                        We will need a little more info than that. Where? What will the enitities be doing? How many owners? Will they all be profitable immediately or do you anticipate significant startup losses?

                                         

                                        Im in iowa. One division will be a clothing company. The other will be a real estate company. The other will be a entertainment company. The parent company i am the only owner. The real estate company there will be 2 owners. The clothing will have 5 owners. The entertainment company will have 2 owners. I expect only the entertainment company to take a loss the first 2 years. And the rest will be profitable immediately
                                    • Re: Right form of entity - S-Corp. vs. LLC
                                      rhildreth Newbie
                                      Hey read your to your web site but I was not able to find/download the excel file. Any suggestion?

                                      Thanks
                                      • Re: Right form of entity - S-Corp. vs. LLC
                                        rhildreth Newbie
                                        What i was trying to say, is I cant find your excel file to download. Any help is appreciated. thanks