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34coupe
03-19-2009, 12:26 AM
Helo All,
Newbeeee Here,

New handyman business. Registered as an LLC in the state of NY.
Should the structure be registerd as an S-Corp for tax purposes.
Is it true that I will still operate as an LLC and be taxed as an S-Corp??

The business will be part time as I will keep my current job until the business grows.

Thanks
T

Business Attorney
03-19-2009, 12:40 AM
Yes, you can elect to have your LLC taxed as a corporation and then make an election to be treated as an S Corp (that is two steps).

As to whether that is best for you, that is tough to say without knowing ALL the facts (and being able to roughly predict the future). You can read about some of the pros and cons of an S Corp vs an LLC (http://www.limitedliabilitycompanycenter.com/llc_vs_s_corp.html) on my website.

Good luck with your new business.

Evan
03-19-2009, 01:12 AM
An S-Corp isn't right for every business type. Also keep in mind that in order to be an S-Corp, there are requirements that must be satisfied in order to maintain the election. If your S-Corp election is ever revoked, your default tax status will still be as a corporation.

There are tax consequences of having your S-Corp reverted back to a C-Corp, or taking the C-Corp and reverting it back to a disregarded entity (and none of them are desirable).

34coupe
03-19-2009, 01:16 AM
Thanks for the reply David,

I read the article on your site, but I am still confused.
So am I operating as an S-Corp or an LLC??
I understand the tax issues between the two but are you allowed to operate as an LLC and only adopt the S-Corp when taxes are involved?
I hope Im not confusing this whole thing. (sorry)

I believe I have to file a 2553 to operate in this manner.

Thanks
T

34coupe
03-19-2009, 01:20 AM
Hello Evan,

Where can I find these requirements?
I thought I can operate as an LLC and the S-Corp was just for tax purposes??

Tony

Evan
03-19-2009, 01:27 AM
To elaborate a bit more, an LLC as an S-Corp often doesn't make sense as you give up some of the "benefits" of an LLC.

Say there are two partners in the business. Ownership in an S-Corp is determined by what is contributed to the business. This means that if I contribute $25,000, and you contribute $50 but do all the work -- we can't split profits 50/50. (This would be fine as a partnership).

Also, if you have a few unprofitable years, your losses are only deductible to the extent of your basis in the S-Corp. So say your basis is $25,000, but your share of the losses for the year is $32,000 -- you are only able to deduct $25,000. If you contribute additional capital, you can take the remaining loss in a future year.

Then there are other complex factors. Say you decide to do some investments -- but you're in the highest tax bracket but your partner is in the lowest tax bracket. In that case, you'd rather pay preferred tax rates (15%) over your standard tax rate (35%), while your partner doesn't give a hoot either way. As an S-Corp, profits/losses need to be distributed equally. If you were a partnership, they could be allocated differently.

The structures of LLCs can become quite complex, and certainly you may operate just a basic company. But there are more considerations to keep in mind. This includes whether it's worth the hassle of figuring out payroll and withholding. (Mistakes are costly!)

The directions are here to make the election (after you choose to be taxed as a corporation): http://www.irs.gov/pub/irs-pdf/i2553.pdf. I recommend Googling some sites with information on this than reading the IRS instructions. Your eyes may glaze over real quickly.

34coupe
03-19-2009, 01:50 AM
Thanks Evan I will

Business Attorney
03-20-2009, 02:06 AM
Tony,

It sounded like, from your question, that you will be the only owner (at least at first). In that case, your LLC will disregarded for tax purposes and you will report all the income and expenses on your own Form 1040 Schedule C. That is, unless you elect to have the LLC treated as a corporation. If you elect to treat it as a corporation (Step1) then you may also elect to treat it as an S corporation by filing Form 2553 (Step 2).

As Evan noted, there are disadvantages of an S corporation that accompany the advantages. In fact, while I know an LLC can elect to be treated as an S corporation, I have never actually seen it done. In most cases, people would simply form a corporation rather than an LLC if they planned to make an S election.

As for your question to me, yes you would operate the entity as an LLC and only file taxes as an S corporation. Under state law, your entity would be an LLC. All your operations would be governed by the state's limited liability company statute, not by the business corporation statute.

The IRS decided about a decade ago that rather than try to determine whether a non-corporate entity is more like a corporation than not, they would simply let taxpayers choose ("check-the-box") which which tax classification they wanted for the entity.

The federal tax regime you choose generally has NO EFFECT on how your entity is treated under state law (though it probably will affect how your entity is treated for state income tax purposes because most states' income taxes are based upon the entity's federal tax reporting).

Evan
03-20-2009, 11:11 PM
In fact, while I know an LLC can elect to be treated as an S corporation, I have never actually seen it done.

Lucky you. One think that could impact which way you go (S-Corp, or LLC taxed as S-Corp) is the way your state treats the entity. For example, in MA, it is cheaper to incorporate. Also, the annual tax ($456) and annual report ($100) is much cheaper for the corporation than the annual tax ($500) and annual report ($500) for the LLC.

Business Attorney
03-21-2009, 01:01 AM
For example, in MA, it is cheaper to incorporate.

The same is true in Illinois.

bwat05
03-22-2009, 10:26 PM
How is paying employees (non owners) handled in an LLC?

Evan
03-22-2009, 10:43 PM
The same was as a corporation. You must register with the state in order to withhold state taxes. There may be some taxes that need to be withheld that the state sets a variable rate.

In Rhode Island, for example, all employers are subject to a tax called the "Employment Security" that varies based on your total payroll, what your "balance" is with the state, and how often they have to use this account. Rates vary as low as fractions of a percent to up to 14%, with most having a very low rate.

It is important to remit taxes on a timely basis as failure to do so may result in penalties. There are many payroll providers who can handle this on your behalf. But depending on your needs, that may not be necessary.

I have always processed payroll myself, but I'm aware of the rules.

huggytree
03-28-2009, 03:52 PM
100% sure you are best off being a LLC and filing your taxes as a S-Corp.

im a 1 man plumbing company and its what i do.

to become a S-corp it costs $1,000+
to become a LLC costs $100

you will basically run your business as a S-corp. but technically your a LLC

when some day you get alot of employees its better to be a C-corp.

Business Attorney
03-28-2009, 11:05 PM
100% sure you are best off being a LLC and filing your taxes as a S-Corp.

im a 1 man plumbing company and its what i do.

to become a S-corp it costs $1,000+
to become a LLC costs $100

you will basically run your business as a S-corp. but technically your a LLC

when some day you get alot of employees its better to be a C-corp.


Huggy, except for "im a 1 man plumbing company and its what i do" everything you said is simply untrue in many, if not most, circumstances. If you said "100% sure I am best off being a LLC and filing my taxes as a S-Corp." you might be right on your present facts but might find yourself in a completely different situation if the facts change.

First, in most states forming an LLC and a corporation are about the same cost. In fact, the online Wisconsin Limited Liability Company filing fee is $130 while the online Wisconsin corporation filing fee is only $100. Yes, a corporation needs organizational minutes and bylaws but even a single member LLC should have an operating agreement. There should not be much difference in price. Where did your numbers come from?

In Illinois, it is nearly the opposite of the numbers you give. The filing fees for an LLC are about FIVE TIMES what it costs to be an S corporation. The annual fees are also higher. In most cases in Illinois, if someone wants to be taxed as an S corporation, they should simply be a corporation.

Being an S corporation does have some advantages if the numbers are all aligned right, but there are additional costs. You can pay both a salary (subject to payroll taxes) and a dividend (which is not subject to payroll taxes) if the company's profits exceed a "reasonable salary." However, the one man corporation will need to withhold payroll taxes and file payroll tax returns. Few people can do that correctly and usually have their accountant or a payroll service do it. For someone who is barely making a reasonable salary from the business, the gain would not be worth the pain.

There are many other factors to consider. This is not a "one size fits all" issue.

Evan
03-29-2009, 01:51 AM
Electing to be taxed as an S-Corp as an LLC requires you to comply with all the tax rules that S-Corps are responsible for. This means your LLC may not really be operating as an LLC.

Unfortunately a lot of law instructors are teaching that LLC's are the "way to go" today without any consideration of the specifics of the state or business type. I often challenge that argument from a tax perspective and usually can win over. I do like S-Corps, but it does require some number crunching to see whether it is truly worth the benefit. The companies that truly benefit are the ones who know the rules.

Some single-member LLC owners have also recently found some unintended legal consequences of an LLC versus a corporation. Namely some issues if bankruptcy arises, though many other situations probably do exist.

huggytree
03-29-2009, 10:05 AM
ok they raised the price from $100 to $130

i was told you need a lawyer to become a S-Corp....ive never heard of anyone doing a S-corp on line...i believe you that its available....but i think there's more to it..

When I decided which entity i was going to be there was no question which was better for a small construction related company....S-corp is the best...what entity compete's with it?...which is even close?

bwat05
03-29-2009, 01:58 PM
My business will eventually need a secretary and definitely one fulltime technician.
I would like to be able to provide medical insurance at some point.

I like the idea of an LLC being taxed as an S-Corp primarily to avoid self-employments taxes.
I have plenty of time since I am in the early stages of business creation and have a lot of research to do.
I have noticed many new companies that have formed in the last year or two are LLc's.
I am going to look at my states take on each type and go from there.

Evan
03-31-2009, 12:03 AM
A lawyer to become an S-Corp? It is generally advised to use a lawyer to incorporate OR to form an LLC. Just like you are advised to consult with your financial advisor before making investment decisions (though you probably have a 50/50 shot there!!)