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View Full Version : LLC taxed as Sole Propieterversus LLC taxed as S-corps



tennisboy
02-13-2012, 03:42 PM
Live in Massachusetts and am considering being an LLC but taxed as an S-Corps. Other than the filing fees - which are pricey - isn't it a good idea if one is profitable to be an LLC taxed as an S-corps? Or does it make sense to just be an S-corps and forget the whole LLC thing altogether? I am running a single member consulting company and want to be an S-corps one way or another because I will take a (taxable) salary and (untaxable) distributions.

vangogh
02-14-2012, 12:11 AM
Welcome to the forum tennisboy. This isn't my area of expertise, but I want to help keep your thread active to help it gain the attention of those who'll be able to provide a better answer.

I always point people to the site of one of our members, David, who's written about LLCs (http://www.limitedliabilitycompanycenter.com/). He has some information on the site about corporations in general, including S-Corps. There might be some info on his site to help with your question.

tennisboy
02-14-2012, 12:30 PM
Thanks for that vangogh. I have read that and also some other posts. I think it comes down to the issue of: Do I want the extra paperwork of payroll + taxes that come with the S-Corps (versus LLC as a Sole Prop since LLC as an S-Corps seems to make no sense in MA given LLC fees). So if I do - and I think I do since 75K salary + 100K dividend realizes thousands of dollars in savings - I now have to figure out the best way to do my taxes (TTax seems to have a package for S Corps) and payroll (guessing QuickBooks).

Any guidance here? (I spoke to a CPA last night who was quoting me $1500 to do S Corps and Personal taxes, not including payroll.I think that is steep).

vangogh
02-15-2012, 01:04 PM
I'd like to give you guidance, but this is far, far from my expertise.

$1500 does sound like a lot, though I have no idea if that's a reasonable fee or not. My own taxes are kept simple. I'm sure I would be hiring someone if my business became a corporation of some type. Seems like you've made the decision about how to structure your business. Maybe ask a few more CPAs what they'd charge to do your taxes. I have a feeling $1500 is reasonable and if you'll be saving most through the set up you're thinking it's not a huge amount to spend to get it right. I wouldn't be surprised if at that price a CPA can help you save a similar amount in taxes.

tennisboy
02-15-2012, 04:00 PM
Right but I have had a few bad experiences with CPAs and have only had good experience with TurboTax, hence the reluctance!

Evan
02-15-2012, 10:10 PM
$1,500 for your tax return may not be too far off if you're in the Boston area. You'll certainly be looking to spend $800 for your return, so I don't think that price is too unrealistic. TurboTax is a program, and if you put garbage in, it will produce a garbage return. On an audit, you cannot also blame the software, as the Tax Court has repeatedly stated that "tax software is no substitute for a tax professional."

If you're doing payroll, it's not going to be that too hard if you pay yourself a salary, as your paychecks will be relatively consistent and you're quarterly tax payments, etc. will be relatively similar.

If you want to go the S-Corp route, go the S-Corp route. I wouldn't recommend an LLC taxed as an S-Corp in Massachusetts, as your taxes will be significantly higher. Why are we getting caught up on the choice of entity?

$175K on a Schedule C may not be as nice as flowing through an S-Corp return, and I'd probably say you'd have some considerable savings in an S-Corp for now.

Business Attorney
02-15-2012, 11:52 PM
I'm not a Massachusetts attorney (though I attended law school there many eons ago), so take these as thoughts of an outsider.

For a single-owner entity electing to be taxed as an S corp, there is usually very little advantage to an LLC over a corporation. Yes, the corporation has to have annual meetings of shareholders and directors, but for a single shareholder and a sole director, that means signing the same piece of paper or two: a consent of the sole shareholder in lieu of an annual meeting (http://www.freelegalformslibrary.com/forms/consent-sole-shareholder-1.php) and a consent of the sole director in lieu of a meeting (http://www.freelegalformslibrary.com/forms/consent-sole-director-1.php). There are occasionally other matters that require formal approval of directors or shareholders, but they do not happen often in a small single-owner entity.

Given the fact that in Massachusetts the state fees to set up an LLC are significantly higher than the fees to set up a corporation, and the difference in the fees payable with the annual report is even more, before a person who wants to be taxed as an S corp decides to form an LLC rather than a corporation, there should be a better reason than avoiding creating a couple of pieces of paper every year and filing them away in a minute book.

tennisboy
02-15-2012, 11:53 PM
Thanks for the advice, Evan. Definitely leaning toward that.

I assume I will be drawing a W-2 (from my "salary" in my S-Corps). Do I still have to pay quarterly estimated taxes? I guess that's what QuickBooks will help me with when I get that...

tennisboy
02-15-2012, 11:55 PM
David, I agree with you and will likely go that route. But aren't you understating the other costs/hassle of "paying" myself a salary, etc.?

Business Attorney
02-16-2012, 12:43 AM
David, I agree with you and will likely go that route. But aren't you understating the other costs/hassle of "paying" myself a salary, etc.?

I am not understating them, I am completely ignoring them in this particular analysis. You said you were considering being an LLC but taxed as an S corp. If you are taxed as an S corp, then you will have the costs/hassles of paying a salary REGARDLESS of whether the entity is an LLC or a corporation under Massachusetts law. In my post, the cost of paying yourself a salary is simply a given, and therefore not a factor in the decision.

On the other hand, if you are considering an LLC treated as a disregarded entity, then the costs/hassles of paying a salary (as well as the cost of preparing separate income tax returns for the corporation) should be weighed against the payroll tax savings.

tennisboy
02-16-2012, 01:22 AM
Yep. thanks

Evan
02-16-2012, 09:45 PM
I agree with David's analysis. I think you're confusing an LLC (versus a corporation) taxed as an S-Corp and whether it's easier to be compensated. It's an IDENTICAL process, the only difference is it's "Your Co, Inc." versus "Your Co, LLC" -- the same tax filings will be required.

Estimated tax payments won't be calculated by QuickBooks, which is an accounting software. You need the advice of an accountant or tax professional to know what your estimated tax payments should be. However, if you're paying yourself a salary, I'd try baking into your salary withholdings any taxes you think you'll owe on distributions. So instead of following the standard chart for a person making $50K when you plan to take an additional $50K in distributions, you should see what the wittholdings should be for someone earning $100K and just adjust accordingly. Alternatively, you can file quarterly estimated tax payments.

tennisboy
02-17-2012, 02:24 PM
Thanks. So let me get this straight. Assuming I go the full S-Corps route:

1) I pay myself a (quarterly, monthly, whatever) salary with W-2; AND
2) This salary can be the exact same amount as if I was an LLC (e.g. no withholdings) IF
3) I pay quarterly estimated taxes; WITH THE PROVISO THAT
4) I use my entire take home - salary plus what I think the Dividend/Distribution amount will be- to determine what those quarterly estimated tax payments should be.

Right?

Evan
02-18-2012, 04:30 PM
No. If you're an S-Corp (LLC or as a corporation), you:

1) Pay yourself at whatever frequency for which you'll get a W-2. You need to withhold income tax (federal/state), SS, medicare. Additionally, the LLC/corp (taxed as an S-Corp) will be required to chip in to SS/Medicare, plus federal unemployment. Additionally, you will be required to pay into the Massachusetts unemployment funds.

2) If you intend to take dividends/distributions, you should be paying quarterly estimated taxes. However, IF you know that you're going to be taking $100K in distributions (or ANY amount) for the year, you should see how much INCOME tax should be withheld at that level, and adjust your W-2 accordingly. It'd allow for you to have to pay less (or no) estimated taxes, as they're already paid. This means instead of taking home $1K each week, which after taxes may be $600, you'd voluntarily add an additional $100 in income tax (ONLY), to receive $500. The reason you're doing this is you know down the road, you're going to take a dividend of $2K, and you're trying to put that $100 (each pay period) towards the income tax you'll have to pay on that distribution.

If you're an LLC taxed as an S-Corp, or just a corporation taxed as an S-Corp, THERE IS NO DIFFERENCE WHATSOEVER in the way you handle compensation. They're the same thing.