Straight LLC vs S-Corp?

Discussion in 'Business Operations' started by greenchoppers, Dec 15, 2011.

  1. greenchoppers

    greenchoppers LawnSite Member
    Posts: 162

    Hello,

    Wondering how many of you have changed from straight LLC to S-Corporation? Was the change beneficial to you and are there any regrets?

    Thanks for your replies.
     
  2. NEW CITY LAWN CARE LLC

    NEW CITY LAWN CARE LLC LawnSite Bronze Member
    Posts: 1,268

    Single owner? I would think the tax benefits from being a single owner LLC would be greater that of a Corp...
     
  3. DA Quality Lawn & YS

    DA Quality Lawn & YS LawnSite Fanatic
    Posts: 8,867

    I believe with an LLC you can still file on your 1040 form, no?
     
  4. NEW CITY LAWN CARE LLC

    NEW CITY LAWN CARE LLC LawnSite Bronze Member
    Posts: 1,268

    Yes you can file your home and business together being a single member LLC
     
  5. Kelly's Landscaping

    Kelly's Landscaping LawnSite Platinum Member
    Posts: 4,280

    "A major factor that differentiates an S corporation from an LLC is the employment tax that is paid on earnings. The owner of an LLC is considered to be self-employed and, as such, must pay a “self-employment tax” of 15.3% which goes toward social security and Medicare. The entire net income of the business is subject to self-employment tax.*

    In an S corporation, only the salary paid to the employee-owner is subject to employment tax. The remaining income that is paid as a distribution is not subject to employment tax under IRS rules. Therefore, there is the potential to realize substantial employment tax savings. Case in point:

    Mary owns a print shop. In keeping with the industry standard, Mary decides that a reasonable salary for a print shop manager is $35,000 and pays herself accordingly. Mary’s total earnings for the year are $60,000: $35,000 paid in salary and the remaining $25,000 paid as a distribution from the S corp. Mary’s total employment tax is $5,355 (15.3% of $35,000).

    If Mary were the owner of an LLC, she would have to pay employment tax on the entire $60,000, equaling $9,180. But as an S corporation, she realizes savings of $3,825 in employment tax.

    One might assume that these savings could be further manipulated by reducing the salary to an extremely low amount and attributing the rest of one’s earnings to distributions—but this would be an incorrect assumption. In practice, the IRS is careful to notice whether a salary is reasonable by industry standards. If it determines a salary to be unreasonable, the IRS will not hesitate to reclassify distributions as salary"


    As you can see they are not equal so you want to pick the one that best helps you.
     
  6. NEW CITY LAWN CARE LLC

    NEW CITY LAWN CARE LLC LawnSite Bronze Member
    Posts: 1,268

    But another point to make here would be she would only pay Self-Employment tax on her Net Profit after ALL expenses have been deducted from total earnings for the year...Ohh and last year with tax breaks this figure on line 6 of Schedule SE was a 50% Deduction, so only 7.65% in Tax on Net Profits..
     
    Last edited: Dec 16, 2011
  7. Kelly's Landscaping

    Kelly's Landscaping LawnSite Platinum Member
    Posts: 4,280

    Obviously you have a LLC I happen to have and S corp. In the example I posted it was something I found explaining the differences and was set up that the 60k was the amount left over after the deductions had been taken. Which means there is a significant savings in that example. I can tell you first hand I get a nice salary and anything else is a dividend so pay very little in income taxes.

    The question was is there a benefit for going S and clearly there can be. If you recall the 2004 elections Edwards was criticized because he set his law practice up as and S corp which saved him $600,000 in self employment tax. I tend to think the OP ought to do a search online LLC vs S corp and read the benefits and negatives to each and both have them.
     
  8. DA Quality Lawn & YS

    DA Quality Lawn & YS LawnSite Fanatic
    Posts: 8,867

    So for an S Corp, for non salary earnings, you state it is a 'dividend'. Is this the same as retained earnings? Not sure what you mean by a dividend as there is no dividend being paid out to anyone.
     
  9. wbw

    wbw LawnSite Fanatic
    Posts: 5,427

    You write yourself a dividend check instead of a paycheck. Do not confuse your status with the IRS regarding pass through taxation with legal protection in case of lawsuit. You cannot co-mingle your monies.
     
  10. wbw

    wbw LawnSite Fanatic
    Posts: 5,427

    Answer ot OP's question. It varies on a case by case basis and you will need qualified legal and/or accounting guidance to make the proper decision.
     

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