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  • LLC vs. S-Corp

We receive frequent requests for consulting on what option is best for a new business – LLC or S-Corp. So, without further to do....

The key benefit of an LLC

An LLC provides limited liability and is helpful for those individuals who would like to have the same legal protection that's given to Corporations (i.e., limit lawsuits to their company) even if the LLC is treated as a Sole Proprietor (Single-memeber) for tax purposes.
 

The key benefit of an S-corp 

Save on Self Employement Taxes, owner/officer treated as employee, and offer benefits that are typically allowed only by corporations.

Key Points on both entities

An LLC is not an IRS filing status. It is an entity type that is allowed per the laws of each state. How is an LLC taxed? The IRS will create a default status based on membership. If there is only one “member” or owner, it is considered a “Single Member LLC” and will be taxed on your individual tax return by filing a Schedule C with Federal Form 1040. You will NOT be filing a separate business return in this case. However, you should obtain an EIN as it is required for an LLC, whithout which, you cannot open a business bank account.

If there is more than one “member” to the LLC, the IRS will create a default filing status of the LLC to be a partnership (unless you live in a community property state). You are also required to file a partnership return by filing Federal Form 1065. Be careful – these are typically due one month prior than your individual tax return (Form 1040) due date. This is automatically required per the IRS and the penalties for late filing are assessed per partner per month. If you do not file on time or file an extension this can add up to a few thousand dollars quickly. All states also require a partnership tax return. The profits or losses will then “flow through” to its partners. No income tax is calculated on this form. The income and taxes “flow-through” to its partners and recorded on the K-1. The partners then report their partner share of income or loss on their Federal Form 1040.

 

The main purpose of an S-Corp is to reduce self-employment taxes. As opposed to income reported on Schedule C, the income reported on an S-Corp return does not flow to the Schedule SE which is used to report self-employment tax. All of the profits derived from the S-Corp are distributed to its shareholders. An S-Corp election needs to be taken in order to get the preferential treatment. This is done on Federal Form 2553 and must be filed by the time the return is due.  There are some late-filing election options available. Please contact our office to discuss this further.

 

Drawbacks to single member LLCs

  • Self-employment taxes at the federal level

  • Some states require separate annual filings (i.e., CA)

  • Some states require separate fees to be assessed on the filing. These fees may be fixed or based on the income of the business.

  • You should to pay quarterly estimated taxes to the IRS as well as your state (if applicable) to avoid penalties and interest.

 

Drawbacks of an S-Corp

  • Owners/shareholders must take reasonable compensation in the form of W-2 wages.

  • A filing of Federal Form 1120S is required.

  • In order to run payroll, you must also have unemployment insurance, worker’s compensation insurance, and in some states disability insurance (may opt out for most industries). Missing any of these can lead to penalties. You must have the insurance in place the first day an employee starts their job. Keep in mind that according to IRS the owner is considered an employee of the S-Corp and the S-Corp must adhere to the employment withholding rules. In some states, you can opt out of Unemployment Insurance.

  • You should to pay quarterly estimated taxes to the IRS as well as your state (if applicable) to avoid penalties and interest.

Our firm has experience setting up LLCs, S-corps, partnerships, and payroll. Please contact us if you would like to discuss this further at 208-935-1040.

Vilensky & Company, LLC offers Individual/ Small Business Tax, Accounting and Bookkeeping Services to clients across Lewiston, Peck, Lenore, Moscow, Kendrick, Troy, Potlatch, Kamiah, Nezperce, Kooskia, Grangeville, Stites, Ferdinand, Greencreek, Cottonwood, Weippe, Orofino, Winchester, Coeur d'Alene, Spalding, Idaho, Spokane, Clarkston, Asotin, Pullman, Washington, and the surrounding areas.

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