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Gross Income VS Business Organization

Discussion in 'Business Operations' started by 32vld, Apr 27, 2014.

  1. 32vld

    32vld LawnSite Gold Member
    Messages: 3,983

    People always debate DBA, LLC, S or C corp. They always talk about liability, taxes, tax rate.

    They never say at which dollar amount does the gross income reach for it pay to go file taxes as a S or C corp.
  2. TPendagast

    TPendagast LawnSite Fanatic
    Messages: 9,966


    I dunno IF there is an answer to this.

    I have never owned an S corp. OR a C corp.
    any I have worked for have already been that way, so I haven't been 'part of the process'.

    I have seen LLCs with quite a bit of revenue, I have seen and owned LLC bigger than an S Corp I'm aware of. Ive seen and been a Sole Prop bigger than an LLC.
    But Ive never seen a Sole Prop bigger than an S corp.?

    Does that help?

    I hope not because I have no idea.

    It appears it has much more to do with the division of personal assets from business assets. When you have an S corp, you have a lot of personal things, planes boats, land, multiple houses …at least everyone I've met/seen is that way.
    You certainly don't want some scrub you hired and don't even see or deal with on a daily basis causing an issue which causes you to lose your personal property in a law suit.
    So I'm sure that's the major reason for the step for many people.

    as far as taxes are concerned, I dunno. That's another persons job. That's what they get paid for.
  3. zabmasonry

    zabmasonry LawnSite Senior Member
    from C. VT
    Messages: 315

    there are two issues at hand. Let me note that I'm not a Lawyer or a CPA.Consult the appropriate professional for your personal situation.

    First is legal status. This is weather you're a sole proprietor (DBA) or a company/corporation (LLC, or Corp). If you're a sole P, you and the business are the same thing, you might have a DBA which allows you to conduct business under a different name, but you're the same entity. If your a LLC/Corp, the business is a completely separate entity from you. You (and perhaps some other people/businesses) own the company. But the company is a completely different legal entity. This provides personal protection from your business liabilities (except those that you personally take on IE a promissory note on a loan). Two notes: as far as I know, very very few people are forming corporations at this time, LLC laws provide more protection and significantly simpler. Second I didn't even mention partnerships because if you're going through the effort of forming a partnership, you probably just form an LLC instead (there are virtually zero situations where a partnership makes sense)

    Second is tax status.
    The important thing here is what entity pays what taxes. A sole proprietor or partnership pays all taxes on their personal returns. ALL business income is reported (after distribution to appropriate parties in the case of a partnership) and taxes are paid. Note that sole p's and partnerships have to play self employment taxes. FYI this type of business tax status is called a pass through entity

    A C-Corp (and only a C-Corp) pays its own taxes. The owners pay taxes on their share of the dividends issued by the C-Corp. If an owner works for the C-Corp they collect a salary, and are taxed as any normal employee on the salary (theoretically the owner should has to take an appropriate salary, but i think that there are plenty of work arounds for this). Note that earnings are taxed twice, once at the corporate level, and once at the individual level

    A S-Corp is somewhere in-between the two above. s-corp status make the business a pass through entity (so no double taxation) but also requires owners to take a salary. I'm sure that there are plenty of other details about S-Corp taxation, but I'm not a CPA. I'm just giving you the big picture.

    A LLC can choose to be taxed using any of the following methods: Sole P, Partnership, S-Corp, or C-Corp. there is some flexibility over time in how a LLC chooses to be taxed. note that the LLC will have an EIN number if it chooses any method other then Sole P.

    As for a little bit of commentary on the subject. To my knowledge there isn't a magic chart with dollar values and what status to use. The best situation is really dependent on each business. An example, I own an LLC. I almost chose to be taxed as a C-corp for the first several years because I expected significant growth, and I wanted to carry a significant amount of cash earnings from year to year (to be spent on capital expenditures as needed) only having to pay the corporate tax rate. My CPA and I eventually decided that the benefit was not worth the chance that I might want the cash in my pocket, not the companies.

    again as stated above: I'm not a Lawyer or a CPA.Consult the appropriate professional for your personal situation.
  4. snomaha

    snomaha LawnSite Bronze Member
    from midwest
    Messages: 1,189

    If I had it to do over again, I would form an LLC and elect to be taxed as an S corp the day I opened for business.

    LLC is relatively cheap to set up, much less administrative duties vs S corp, tax savings on distributions and protection of personal assets.
  5. 32vld

    32vld LawnSite Gold Member
    Messages: 3,983

    Sole P income is straight and easy.

    Whether a S corp or a LLC filing as an S corp can require one, two or all three of the following. An accountant, tax lawyer, CPA.

    Basic tax advantage if filing as an S corp is that you can pay yourself a reasonable salary. Say $50,000. For example you pay 28% income tax.

    Then you take dividend income on the balance which is at 13%. Mitt Romney, William Buffet, Donald Trump try to go the dividend rate of 13% as much as possible. All rich people do. Probably the Clintons do as well

    Now does it pay to drop H&R Block and hire a CPA, tax lawyer, etc. when the business grossed $51,000?

    Does not appear enough money from that $1,000 extra gross to pay for that expert advice to even leave the owner $13 in dividends.

    Or does the business have to gross $100,000. Owner takes $50,000 salary at 28%, then $50,000 dividend at 13%

    The quest for the elusive Break Even Point.
  6. snomaha

    snomaha LawnSite Bronze Member
    from midwest
    Messages: 1,189

    I think you are comparing apples and oranges with S corp vs publicly traded companies.

    S corp dividends/distributions save you FICA taxes (13%) if you pay yourself a fair market wage. Any dividends pass through to the shareholders and are taxed at their income tax rate.

    The Buffets and Romney's of the world take advantage of the capital gains tax - 15% on corporate dividends.
  7. 32vld

    32vld LawnSite Gold Member
    Messages: 3,983

    I prefer to think that I am confusing Golden Delicious to Empire.

    Whether LLC, S, C, if there is not enough income the additional expense and work required to go that route will not pay until the break even point is reached.

    Again I seek that elusive break even point.
  8. wbw

    wbw LawnSite Fanatic
    Messages: 5,994

    My CPA tells me that when my salary + profit = 200k it is time to go S corp.
    Posted via Mobile Device
  9. shane-pa

    shane-pa LawnSite Senior Member
    Messages: 338

    Sometimes it isn't always about the money side of things. Personal liability comes into play here, too. I am starting my 4th year in business. I have amassed a lot of equipment and am doing larger jobs with increasing liability. Forming a business structure offers protection from lawsuits so you don't lose the farm.
  10. zturncutter

    zturncutter LawnSite Bronze Member
    Messages: 1,308

    Two things you should never do on Lawnsite -

    Get legal advice or financial advice. In Florida a CPA has to take 80 hours of CEU's just to stay licensed. There are reasons for that. There are benefits of being an S corp. that have not been mentioned on this thread, go talk to a CPA.

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