Need help LLC. Vs. Inc. What's the best choice.
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  1. #1
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    Default Need help LLC. Vs. Inc. What's the best choice.

    Ok. So I bought an existing gear shop about 11 years or so ago. At the time I was encouraged by a friend of mine that ran a small business to make it an LLC. I had a little business experience at that time but not much. I was Hellbent to go into business for myself and the opportunity was right in front of me. I thought at that time that I could learn as I went along. Holy crap am I learning! WooHoo! I can tell you all for sure that I've learned that I'm probably not the best businessman in the world. Ever.

    Now looking back, I'm not sure if an LLC was the right choice. Almost all of my customers and a lot of vendors and other machine shops I know of are Inc. Did I make the wrong choice?
    There seems to be a lot of issues with an LLC as far as how and what I can pay myself and business partner. I've talked to the accountant but he's not been able to put the answers to my questions into English that I can understand. I spoke to a lawyer and that didn't go any better.
    Can anyone break this down for me so that I can understand the difference between the two, and maybe I can work from there.

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    For a small business, there's no real advantage to being a corporation. Being an LLC gives you much more flexibility.

    Separate from your company structure is how you're taxed. You have a partner, which implies there is more than one owner. You basically have three options on how you're taxed: partnership, s-corporation, or c-corporation. There are advantages and disadvantages to all three. If you're small, partnership might be the best option for you, especially with the new tax law. Your accountant should be able to discuss the three tax options. If he can't, you need to find a better accountant.

    I am not a lawyer, etc.

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    Quote Originally Posted by DanielG View Post
    For a small business, there's no real advantage to being a corporation. Being an LLC gives you much more flexibility.

    Separate from your company structure is how you're taxed. You have a partner, which implies there is more than one owner. You basically have three options on how you're taxed: partnership, s-corporation, or c-corporation. There are advantages and disadvantages to all three. If you're small, partnership might be the best option for you, especially with the new tax law. Your accountant should be able to discuss the three tax options. If he can't, you need to find a better accountant.

    I am not a lawyer, etc.
    My business partner is my wife. The tax question hasn't really been a problem. I'm more concerned with salary. The rules for paying myself and wife are the problem I'm having.

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    One can never say, talk to a CPA.
    I'm a C but if I had done the LLC route it appears I'd have about 40,000-60,000 more in my take home savings today.
    BUT, being a C back then did get me in some doors so who knows.
    Some of this depends on how big you want to be and how much profit you are generating.
    C taxes, forms and board minutes are more complicated so expect to pay more for help with such at the end of each year.
    And then the S-corp, which is sort or a LLC but not and state laws vary.
    Bob

    Buy high paid advice from someone who knows the type work you do. Otherwise it's a 50/50 at best.
    I went against such advice and paid for it.

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    Quote Originally Posted by DanielG View Post
    For a small business, there's no real advantage to being a corporation. Being an LLC gives you much more flexibility.
    This is not correct. There comes a point where it makes sense to incorporate.
    I still don't fully understand it. But, my accountant does.
    We worked the numbers for me in 2017 as both an LLC, and an S-corp (my business is me/owner, one employee). S-corp saved me $18k in taxes.
    Where it gets tricky is determining how much to pay yourself.

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    Quote Originally Posted by wheelieking71 View Post
    This is not correct. There comes a point where it makes sense to incorporate.
    I still don't fully understand it. But, my accountant does.
    We worked the numbers for me in 2017 as both an LLC, and an S-corp (my business is me/owner, one employee). S-corp saved me $18k in taxes.
    Where it gets tricky is determining how much to pay yourself.
    You are talking about tax treatment, not whether the company is an LLC or a corporation. As an LLC, you can elect S-corp taxation, just as you can with a corporation.

    A bit OT from the original question, but you should have your accountant redo the S-corp vs. disregarded comparison for 2018 and later. The new QBI deduction changes things quite a bit. The big advantage of the S-corp election is that you could take part of your profit as a dividend, saving on self-employment tax. The downside now is that the amount you have to pay yourself on a W2 doesn't count towards the QBI number.

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    Quote Originally Posted by gear cutter View Post
    My business partner is my wife. The tax question hasn't really been a problem. I'm more concerned with salary. The rules for paying myself and wife are the problem I'm having.
    Assuming you are a disregarded entity (i.e. you put your business on your Schedule C) paying yourself is easy. You just take a draw. When you give your books to your accountant, make sure you tell them how much of a draw you took that year.

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    You probably didn't make the wrong choice.

    You can be an LLC and have all income pass through to you and your wife or you can choose to be an LLC and actually make an election to be taxed as an S-Corp (you may have already done this). This election gives you the benefit of paying yourself a reasonable salary and taking the remaining business profits as a distribution (meaning the distribution portion is not subject to payroll taxes). Just in case you're starting from square one, make sure you understand that an LLC and an S-Corp are both 'pass through' entities meaning all income flows through to the owner and there are no entity-level taxes paid. This is not the case with a C corp where there is entity level taxation (meaning you're taxed on your profits once when you earn them as a business, and again when they're distributed to owners - often referred to as double taxation) You probably don't want to be a C corp.

    There are advantages of every form of business and some of this will depend on the laws of your state, how much money you're making, where you're doing business...etc. Prepare a list of questions and talk to your accountant. If you want to make the most of the meeting, get an idea of where your business is headed in the next 1, 5 and 10 years in terms of revenue, employees, healthcare, retirement, general finances, etc and share this with your accountant. If you can't paint a picture of where you are and where you're headed, expect general non-specific answers.

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    In my opinion for small to medium business S-Corp is the answer, for large company 100+ employees C-Corp is the right one. If its a small "hobby" business do sole proprietorship to keep thinks simple, then when you make money change to S Corp.

    S Corp pros:
    - don't pay payroll tax on profits, so thats a 12.4% savings
    - if you loose money, it passes through as negative income, so if your other half works it reduces your tax bill (thats where all the drama that "Trump didn't pay taxes came from, had a huge loss in years past and wrote it off)
    - New tax law for 2018 and on, allows 20% deduction of profits

    S Corp cons:
    - If you make a bunch of money one year and want to save it for future purchases/growth, you still pay tax on it, even if you don't take it out of the business. Thats where C Corp wins.

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    I know just enough to at least question a cpl of points made:

    This is not the case with a C corp where there is entity level taxation (meaning you're taxed on your profits once when you earn them as a business, and again when they're distributed to owners - often referred to as double taxation) You probably don't want to be a C corp.
    This could be more the case if you wait until after your "end of year" and you find profit in there, and then decide to take it out?
    B/c if you know about where you are - you can (should?) be pulling that profit out as income of some sort before you get to 12/31, and then it's not profit.

    ???


    S Corp cons:
    - If you make a bunch of money one year and want to save it for future purchases/growth, you still pay tax on it, even if you don't take it out of the business. Thats where C Corp wins.
    I'm thinking that any profit that stays in the business account is taxed at 21% (that number could possibly vary depending on size?) - no?
    The C corp is just a personalized version of business and is subject to the same rates as an individual?


    The two quoted posts here seem to be in stark contrast to each other. One wants to tax you on profits, and the other says that you can save.

    ???


    Now - one nice point of C corp that was real nice for us one time was that the corp can carry losses for 7 (?) years.
    If you lost $10K this year- and make $5K next year, no taxes, and you still have $5k to carry on yet.

    Note of course that you likely have paid income tax on your personal income that you took throughout that loss year - as you as a C corp are an employee.




    edit:

    Dragging that out further for those not following...

    Throughout the year, your business had a gross profit of $90K, but after your personal payroll of $100K, your business shows a loss of $10k.
    You personally would have paid income tax on the $100K that you drew from the business, and now the business is in the hole $10k.



    -------------------

    Think Snow Eh!
    Ox

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    Quote Originally Posted by Ox View Post
    The two quoted posts here seem to be in stark contrast to each other. One wants to tax you on profits, and the other says that you can save.

    ???
    C-Corps are subject to an entity-level tax, S-Corps are not. I would assume Insert is focusing on the tax burden of the individual and means that if you are an owner of a C-Corp, you can avoid paying tax at the individual level on any undistributed profits earned in the C-Corp.

    Edit: Let me add a simple example that might help clarify a possible drawback of being an S-Corp. Many people on this forum (myself included) are the sole owner of their business. This gives us a lot of control over how cash is managed and removed from the business (through payroll, distributions, etc) and we can tweak everything to suit our own financial needs.

    Let's say that isn’t the case and your business is an S-Corp with 5 owners (your interest is 20%). Now assume at the end of the year your S-Corp shows $500k in profits. Because you're a pass through entity as an S-Corp, all income reported by the S-Corp flows through to the owners and is taxed at their respective individual rates. Keep in mind that this doesn’t mean any cash has actually been distributed to the owners. Let's keep it simple and say that you now have to report and pay tax on your entire share of the income ($100k). If you were the sole owner, not such a big deal in most cases as you control the bank accounts of the business and can keep the cash flowing to the owners in line with profits attributed to owners. In this example though, you have 4 co-owners who might have decided to hang on to the cash within the business to ramp up for some kind of big spending in the next year (or for any number of other reasons). They may not have distributed much (or any) cash to the owners, yet the profit will still be attributed to your ownership interest and now you personally owe tax on that $100k.

    That can be a pretty big hit which would not occur in a C-Corp. In short, it’s hard to say there is one ‘right’ form of business. There are up sides and down sides to every type of entity.

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    Quote Originally Posted by Ox View Post
    This could be more the case if you wait until after your "end of year" and you find profit in there, and then decide to take it out?
    B/c if you know about where you are - you can (should?) be pulling that profit out as income of some sort before you get to 12/31, and then it's not profit.

    ???
    You are correct; if you plan ahead, you can take money out as salary. You won't pay corporate income tax on those dollars, but you will owe payroll taxes and personal income tax on them. You also won't get the QBI deduction.

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    Quote Originally Posted by Insert View Post
    In my opinion for small to medium business S-Corp is the answer, for large company 100+ employees C-Corp is the right one. If its a small "hobby" business do sole proprietorship to keep thinks simple, then when you make money change to S Corp.

    S Corp pros:
    - don't pay payroll tax on profits, so thats a 12.4% savings
    - if you loose money, it passes through as negative income, so if your other half works it reduces your tax bill (thats where all the drama that "Trump didn't pay taxes came from, had a huge loss in years past and wrote it off)
    - New tax law for 2018 and on, allows 20% deduction of profits

    S Corp cons:
    - If you make a bunch of money one year and want to save it for future purchases/growth, you still pay tax on it, even if you don't take it out of the business. Thats where C Corp wins.
    If you are talking tax treatment, you may be correct, with the exception that you can't avoid paying payroll tax on all of the money. You need to pay yourself a "reasonable" salary. This salary will be subject to payroll taxes, and will not be elegible for the QBI deduction.

    If you are talking company structure (remember company structure and tax status are two different things), that is very dangerous advice. If you are a sole proprietorship, you have unlimited liability. LLC's are cheap and can help protect your assets.

    Exactly where in the size scale it makes sense to change your tax status from disregarded entity to S-corp has, IMO, risen with the new tax law. It used to be a simple calculation of when the saved payroll tax would pay for the accountant to do another return. It's much more complicated now with the QBI deduction and its phaseout. It depends on how much your spouse earns, what other income you have, how much you pay your employees, etc.

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    The conversation has run off about "c" or "S", the Op specifically asked about "LLC" versus "Inc".


    so how about it ?

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    First, what a LLC is and is not.

    A LLC can be treated as a partnership or a S-corp, depending on how the owners set it up and declare it to the IRS:

    Single Member Limited Liability Companies | Internal Revenue Service

    Second, like the S-corp, a LLC is supposed to be a pass-through organization. Profits and losses "pass through" the LLC to the investor/owners' 1040's.


    C-corps can do two things that are very significant: first, a C-corp can accumulate cash/profits on its own balance sheet. S-corps and LLC's are supposed to pass through profits to the owners/investors' 1040's, and cash isn't supposed to build up on the asset sheet of the LLC. In a C-corp, the corporation can build assets on its own balance sheet year after year. The taxes are paid by the C-corp on profits, and having declared that income and paid taxes on its own tax return, the C-corp can build assets independent of the tax returns of its owners/investors.

    The second thing a C-corp can have is the ability to have many owners, ie, sell stock (even if it isn't public traded stock or debt investment).

    Last issue C-corps enjoy over LLC's and S-corps is that, in chancery and tax courts, their case law is much more well established than the case law for LLC's and S-corps.

    The biggest downside of C-corps is the double taxation of income.

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    Quote Originally Posted by wyop View Post
    C-corps can do two things that are very significant: first, a C-corp can accumulate cash/profits on its own balance sheet. S-corps and LLC's are supposed to pass through profits to the owners/investors' 1040's, and cash isn't supposed to build up on the asset sheet of the LLC. In a C-corp, the corporation can build assets on its own balance sheet year after year.
    The first part of your post is correct about options for tax treatment of an LLC. The part quoted above is incorrect. Cash can most definitely accumulate on the balance sheet of an LLC, S-Corp, or C-Corp.

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    Quote Originally Posted by digger doug View Post
    The conversation has run off about "c" or "S", the Op specifically asked about "LLC" versus "Inc".


    so how about it ?
    When you see Inc, it means subchapter C corporation or subchapter S corporation. Comparing this to an LLC isn't straightforward because you can be an LLC taxed as a sole proprietor (disregarded for federal tax purposes), a partnership, or you can elect to be taxed as an S corporation.

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    A fundamental difference between an S-corporation versus an LLC Is how the owners can distribute profits.

    For an S-corp, your percentage of ownership is exactly the percentage of profit/loss that passes through to your individual K-1.

    For an LLC, the owners can decide what percentage of the pass-though profit/loss is allocated to each individual owner, regardless of ownership percentage.

    It is mainly for this reason I think the LLC was invented, so that big money men can play a few more games with hiding and/or shifting their profits around...

    The simplest, most common corporate-tax entity for small businesses is the S-corp. So unless, your accountant can give you some good reasons to go LLC, I say stick with the S-corp.
    Last edited by cnctoolcat; 11-05-2019 at 11:43 AM.

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    Quote Originally Posted by cnctoolcat View Post
    For an S-corp, your percentage of ownership is exactly the percentage of profit/loss that passes through to your individual W-2.
    Keep in mind that the W-2 will show wages (salary, bonuses, etc) but not your share of business profits. For those with ownership of an S-Corp, a multi member LLC, or an LLC taxed as an S-Corp, this will be shown on a K-1.

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    Quote Originally Posted by cnctoolcat View Post
    A fundamental difference between an S-corporation versus an LLC Is how the owners can distribute profits.

    For an S-corp, your percentage of ownership is exactly the percentage of profit/loss that passes through to your individual K-1.

    For an LLC, the owners can decide what percentage of the pass-though profit/loss is allocated to each individual owner, regardless of ownership percentage.

    It is mainly for this reason I think the LLC was invented, so that big money men can play a few more games with hiding and/or shifting their profits around...

    The simplest, most common corporate-tax entity for small businesses is the S-corp. So unless, your accountant can give you some good reasons to go LLC, I say stick with the S-corp.
    The CPA we currently use has said we could switch to an S-corp but I really didn't understand the reasoning at the time he proposed it.


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