Legal Question in Tax Law in Pennsylvania
Taxation of an LLC as an S-Corp?
I'm in the process of starting a tech consulting bus. where I will be the sole owner. I'm trying to decide whether to create the entity as an LLC or an S-Corp. I like the flexibility of a LLC but would like to take advantage of the employment tax benefit that comes with an S-Corp. That being I would only pay 15.3% taxes on the [reasonable] salary I pay myself. If I were to form as an LLC I would need to pay the employment tax on the total distributions.
Or so I have read...
My problem is that each ''expert'' that I have talked to has given me different opinions. All have stressed the same regarding the personal liabilities of each entity. However, this taxation issue has been described to me in various ways.
The most intriguing scenario explained to me by an Accountant, is that an LLC does not exist to the IRS. I was told that, in fact, there is no form for an “LLC” to file taxes. This accountant explained to me that an LLC is basically the legal shell for which the company is formed. However, for taxation, an LLC entity elects and files a form with the IRS and the state whether to be taxed as a S-Corp, sole prop., partnership, etc. In which case, can I form as an LLC and be taxed as an S-Corp?
2 Answers from Attorneys
Re: Taxation of an LLC as an S-Corp?
Many attorneys answer this question by asking how much (in profit) you expect the business to earn.
If the answer is that the business will earn well in excess of $100,000 -- say for example, $300,000+ -- then the answer is often that a S corporation might be best from the owner's employment tax standpoint (by allowing distributions to the owner free of employment taxes).
Otherwise, the LLC is often a good choice given that there are no requirements to file returns at the corporate level.
There are a number of other issues to consider as well. These other issues might end up being more important than the initial employment tax implications.
For example, you may find that a single member LLC is also disregarded for bankruptcy purposes. Most business owners never dream that the business that they are starting will fail, yet alone that it will leave behind debt that its revenues and assets cannot afford to pay. The reality is that many businesses fail. Business debt that is left behind by a failed business that is disregarded for bankruptcy purposes can devastate even the best personal financial plans.
And then there are the issues surrounding employee payroll (liability), availability of various tax saving employee benefits, and even various tax credits (such as the research and development tax credit).
It is often best to pay a tax attorney to provide advice given your specific plans and facts.
Re: Taxation of an LLC as an S-Corp?
Not the best choice in most situations. The question is what do you expect to take in salary? There is a point (around 90k) after which you don't have to pay the SS (larger) portion of FICA taxes anyway. A lot of people get hung up on the self-employment tax issue - it isn't that big of a deal most of the time once you run the numbers. Besides, the IRS has been on a witch hunt lately arguing that sole shareholder s-corp distributions are disguised compensation subject to FICA taxes.
Figure out which form suits better for all the other reasons, do the math and then pick. For most people the flexibility of an LLC makes it a good choice.
And yes, Single Member LLC's (not multi-member) are disregarded entities for FEDERAL income tax purposes. Any income/loss/deduction is reported on your personal 1040.
Related Questions & Answers
Looking for something else?
10,200 active attorneys ready to answer your legal questions today.
Featured Attorneys
Earn additional revenue and grow your business.
