S Corp vs. LLC

Discussion in 'The Okie Corral' started by bwphoto, Mar 6, 2010.

  1. bwphoto

    bwphoto Lifetime Member

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    It's just me, no employees. I'd be doing a similar job for the same company but as a 1099 than salary. Using all my own equipment, vehicle, office, paying for my own health care - essentially becoming a marketing and photography consultant instead of a strict 9-5 employee. I'd also be freelancing again, but my primary client would likely remain my current employer.

    Any major difference between an S Corp. and an LLC? How does one know what is right for them? I plan on finding an accountant in the next week or so, but want to be a little more up on this topic than I am currently.

    Thanks!
     
    Last edited: Mar 6, 2010
  2. bwphoto

    bwphoto Lifetime Member

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    OK, so maybe it's best to be an LLC w/ S-Corp taxation.
     

  3. longhair

    longhair

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    Talk to your accountant. He/she will tell you the advantages of both.
     
  4. huskres

    huskres

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    Probably s corp. Thats what I am setting up now.
     
  5. CharlestonG26

    CharlestonG26

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    FWIW, switching long-term employees to contract 1099 employment is a very easy way to eventually get rid of them...without paying severance or risking legal consequences.
     
  6. Rooster Rugburn

    Rooster Rugburn Got Pignose?

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    I used an incorporation service and she referred me to this website to help my decision.

    http://www.inc.com/articles/2000/05/20152.html


    The LLC is better if you are going to be big, with a lot of capital equipment. And an S-Corp offers benefits with stock dividends etc, IIRC.

    I am an S-Corp.
     
  7. meleors

    meleors Cranky Member

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    Actually, if those former employees only contract to their former employers and make no business decisions, the IRS will determine that they are in fact employees and not a self employed contractor. The employer will be in trouble for trying to stiff the IRS.
     
  8. Gallium

    Gallium CLM

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    This.


    Also, I hope your rates are reflecting the self employment taxes you'll have to pay.

    'Drew
     
  9. CharlestonG26

    CharlestonG26

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    But quite doubtful in the example the OP laid out:
    "...Using all my own equipment, vehicle, office, paying for my own health care - essentially becoming a marketing and photography consultant instead of a strict 9-5 employee. I'd also be freelancing again, but my primary client would likely remain my current employer..."

    Once a person switches form employee status to contractor status...it is very easy for the former employer to close the door on them.
     
  10. community

    community Member

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    since you are the only shareholder, the S corp would be the way to go. LLC allows profits/losses to be allocated on a predetermined percentages to each shareholder. Since you only have one shareholder, all the profits/losses are funneled toward for personal 1040 tax return. my 2 cents.
     
  11. bwphoto

    bwphoto Lifetime Member

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    Thanks guys.

    Charleston, I did consider the potential "ease of firing" this creates for my current employer. However, this is my first real 9-5 gig and I hate it (I've always worked on a freelance basis). So while the company I'm with now originally liked the structure and predictability of me as an employee, it isn't necessary and doesn't make sense financially for either of us. They're a lot less sensitive to the tax burden than I am due to their much deeper pockets, so it's really my idea and desire to see this change.
     
    Last edited: Mar 8, 2010
  12. LoadToadBoss

    LoadToadBoss IYAAYWOT

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    Both S-corps and LLCs are "pass-through" entities. That is, profits pass through the company to the owners' personal income tax return.

    A single-member LLC is considered a "disregarded entity" by the IRS. That mean, the business's revenue and expenses are reported on Schedule C of the individual Form 1040 (unless the single-member LLC elects S-corp treatment).

    For an S-corp, the revenue and expenses are reported on Form 1020-S. The profits (or losses) then pass through to the shareholder's personal income tax return through Schedule K-1 (Form 1020-S). The profit or loss is then reported on Schedule E of the individual 1040.

    The bottom line is that for a single-member LLC or a single-member S-corp, the tax treatment is generally the same. There are differences with respect to dividends and wages. For an LLC, the members do not take dividends. S-Corp shareholders can. What that means is that if you are an owner-employee of an S-Corp, you can pay yourself a low wage and take profits through dividends. The benefit is that wages are subject to FICA/FUTA/SUTA taxation to the business; dividends are not. The IRS takes a dim view of S-Corp owner-employees taking their wages entirely as dividends. However, if you pay yourself a fair wage, you can also collect dividends and have that money escape FICA/FUTA/SUTA taxation.

    Also, dividends will not factor into calculating your worker compensation insurance. Yes, you will want to get workers comp insurance to protect you in case you're injured on the job. In most states it's a requirement if the business has any W-2 employees. And you will be an employee of your own business.

    With respect to liability, both business forms offer limited liability to member/shareholders. The "limit" includes whatever constitutes your inital capitalization of the business (i.e., start-up money/assets and other equity). However, for single-member LLC or single-shareholder S-corp, any good lawyer can "pierce the corporate veil" and go after your personal assets, especially if you co-mingle business and personal funds/assets. When that happens, there's no clear distinction between the business and the owner. It is important to remember that what the business owns is NOT your property. The money that the business earns is NOT your money. It belongs to the business and you can only take what is allowable via your LLC Operating Agreement or S-Corp shareholder charter.

    With respect to contracting with your former employer to provide similar services you did as an employee, make sure you are allowed to provide those services to other agencies. Don't let your former employer have exclusive rights to your services unless they are willing to sign a long term contract with big penalties for their breaking the contract.
     
    Last edited: Mar 8, 2010
  13. silentpoet

    silentpoet

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    It would probably be worth it to talk to a business lawyer for an hour or two of his time.
     
  14. Obi Wan

    Obi Wan

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    Excellent info there.

    In regards to the liability issues, it was my lawyer's opinion that the LLC veil hasn't been thoroughly tested and, thus, felt the S-Corp route carried more liability protection with it, provided I kept all assets and accounts separate, etc. Just make sure you do it no matter which format you choose. Do NOT co-mingle funds in any fashion.

    Good luck.
     
  15. LoadToadBoss

    LoadToadBoss IYAAYWOT

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    The LLC form provides good liability protection for multiple member "partnerships." A single member LLC is view like a sole proprietorship creating unlimited liability of personal assets. In either event, keep assets separate. If you have a car purchased by the business, you can't use it for personal use without generating taxable income to you. If you buy a computer with business funds, you can't let your kids use it for their homework. It's not yours; it's belongs to the business. You and your business are not the same.

    If you form an S-corp, if you die, the business still lives on.
     
  16. 220-9er

    220-9er

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    Why are you incorporating at all? Talk to an accountant first. Incorporation is mostly for limiting liability in your situation.
     
  17. CBDAVIS

    CBDAVIS

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    I think you miss stated about a single member LLC creasts unlimited liability.
    It's disregarded for tax purposes, but if you operate as a LLC there is limited liability--separate bank accounts, letter heads, signage, and invoices in the name of the LLC.
     
  18. nursetim

    nursetim

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    What a timely thread. I am just starting a business. I have a CPA and he recommends just an LLC. It sounds like the S corp is the way to go. Find the lowest pay in the country for what I do, pay myself that and take the rest in dividends. Sounds like a good plan to me.

    Thanks for bringing this up bwphoto. :thumbsup: Good luck.
     
  19. choktog

    choktog

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    One thing to consider with either a single owner/employee S corp or LLC on liabilities is that if the business is liable it is generally through the actions of an employee. Since you are the only employee and since you have unlimited liability for your actions often the S corp or LLC does not provide very good liability protection.(once again this is for single owner S corps and LLCs).
    The best advice has already been stated here see your accountant and they can take the time to talk you through the pros and cons and pick the best solution for your situation.
     
  20. Isaiah1412

    Isaiah1412

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    You definitely want a tax attorney to do this for you. There are advantages from either if you structure them correctly, but correctly varies depending on your own circumstances.

    FWIW its possible to use both, my dad does. He bills for his consulting services and locums under an S corp. All his personal assets are owned by an LLP which my mother is the sole partner of. He set that up to make it pretty much impossible for anyone to the house, or other assets in a malpractice suit. Basically his personal assets consist of just the S corp which is worth next to nothing (its only "asset" is his ability to use it to bill clients).