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Written by : Randolph Beckes |
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hey this is attorney elizabeth potts weinstein and today we're going to talk about the differences between llcs s corporations and c corporations and how to tell what's the right business entity for your business before we get into the differences between those three different type of entities it's important to understand that there's actually only two different type of entities that we're talking about llcs and corporations this is because there are two different considerations that we're going to be discussing one is the legal entity llcs or corporations and the other is how it will be taxed the tax status of your business so you can have an llc that is taxed as either a sole proprietorship or partnership depending if you it's one owner or multiple owners an llc that's taxed as an s corp or an llc that's taxed as a c corp and then you can have a corporation that's taxed as an s corp or c corp so you can see it's a lot of different combinations you can have and that's why we're going to split this up into talking about the legal entities llc's and corporations and the tax statuses whether or not you want to be just a pass-through tax entity like a sole proprietorship or partnership you want to be taxed as an s-corp or taxed as a c-corp when you're looking at llc's limited liability companies versus corporations the first thing you want to look at is the practical consideration how much is it going to cost to set that up in your state or the state in where you want to form it in some places the filing fees between an llc and a corporation are huge some places you have to do publishing of an llc and that's thousands of dollars in some places they pay different state franchise fee taxes there's a lot of differences that are purely logistical and you want to look at your state or the state where you want to form your business entity to see if we're talking about the same fees or thousands of dollars of different fees next you need to look at the owner and what is your status if you want to be taxed as an s-corporation the business owner has to either be a us citizen or have a green card there's also some other requirements too but a business that has an owner who's not a citizen doesn't have a green card can be an llc that's taxed as a partnership so you have to look at the owners to see what's even possible for you before you go ahead and form an entity and then need to switch later the third aspect is looking at your goals so for example do you want to raise money you want to bring in investors and you want those investors to be passive investors it may make sense to form a corporation that you can have a bsc corporation so you can have different classes of shares versus an s corporation you might want to form an llc with investors if the investor is someone you personally know you're just going to have one or two investors but if you're looking to pitch vc you probably want to go with a corporation i forgot one important distinction between llcs and corporations and that is llcs have more simple corporate formalities all entities have some formalities you have to observe such as keeping everything separate your finances separate your personal finances separate from the llc or the corporation's finances but corporations have more corporate formalities including having annual director and shareholder meetings with minutes and if you don't do that then you might have trouble maintaining the status of your corporation as a separate entity a fourth aspect is just your familiarity and comfort level for these types of entities i have some clients where they create corporations because they've had corporations before they know how to do all the paperwork they're very familiar with it and so you want to look at the practical aspect of you and you're the one who has to maintain this llc or corporation over the years what are you going to be comfortable doing and the fifth aspect to think about is the type of business you have some businesses can only be llc's and not corporations or the other way around for example as an attorney in california i had to form a corporation because attorneys are not allowed to be llc's and that's true of professionals in many states many states don't allow them to perform llc's but some do the other aspect is certain kinds of businesses are traditionally formed as llc's or even llps liability partnerships which i'll talk about some other time because it just makes more sense for the kind of business they have they can structure it in a much easier way for example real estate investing businesses tend to be llc's or llps instead of corporations the next aspect is to look at the tax status so you formed an llc or a corporation how would you want it to be taxed if you have a llc and you want it to just have the default tax status that means it's going to be taxed as a sole proprietorship if you're only one person or a partnership if there's multiple people who own it the great part about that it's the default you don't really have to do anything it's relatively straightforward you can take the any losses from that business and apply it against your other income in some situations if you're an active participant in that business and that can be really helpful in the early years of a business if it's having losses at the end of the year but one of the problems of that is if you have profits in at the end of the year and you don't distribute it to the owners you still owe taxes on it and that can be very very frustrating one of the ways to solve that is to do a minimal distribution just to pay taxes but that's something you'll have to calculate at the end of the year another great aspect is the taxes are comparatively simple if you're taxed as a sole proprietorship if you're one owner because it can just be on your schedule c of your 1040 form and that can be something you do yourself or you use commonly available software if your business is an llc or corporation it can be taxed as an s corporation there are limitations on what kinds of businesses can be taxed as an s corporation based upon the status of their owners and i talked a little bit about that before but if you are able to claim s-corporation status this can be a great way to pay less taxes on the profits of your business so for example my business my law firm is organized as a corporation that's taxed as an s corp when i pay myself i can pay myself in two different ways one way is a salary and i pay myself a salary every week just like when i pay my other employees and when you pay yourself a salary as a paycheck you're going to have you know ficas and security all that stuff come taking out of it but i can also do distributions of the profit distributions of the profit is taxed differently specifically you don't have to pay self-employment income taxes on it so can reduce your tax burden but you can't pay just the profits to yourself as a distribution and not pay yourself a salary the irs knows that you want to do that and so you have to pay yourself a legit salary if you're working in the business another aspect of having an llc or corporation taxed as a
Thanks for your comment Bradford Zill, have a nice day.
- Randolph Beckes, Staff Member
if you run your own business or maybe you're just starting out or confused about the distinctions between an LLC and an escort or escorts in general you're in the right place I'm Tony from the really useful information company and in this video we're gonna talk about what an S corporation or S Corp is the benefits of an S corp the complications and potential drawbacks and finally how to decide whether or not choosing an S corp is right for you the following information is for educational purposes this is not legal tax or financial advice before acting on any of this information consult with a registered accountant to begin an S corporation or S corp is not a formal business structure it's a tax classification both an LLC and a corporation can choose to be taxed as an escort for simplicity in this video we will focus solely on LLC's that choose to become S corporations there are single member LLC's and multi member LLC's and both can become escorts and LLC terms a member is an owner LLC members are not employees in fact members cannot be employees in tax terms this means members are not paid a salary they still work of course but they are paid in what are known as distributions when an LLC chooses to be taxed as an S corp it allows members to be paid a salary as well as a distribution and this is where it gets interesting because salaries and distributions in an S corp are taxed differently well look at these important differences in just a moment but before we do we should first have a look at a few restrictions as corporations F S corporations must not have more than 100 shareholders the shareholders must be US citizens or permanent legal residents the shareholders must be private individuals and may not include LLC's other corporations or certain types of trusts and finally s corpse can only issue one class of stock if these restrictions work for you keep watching to see why or why not you may want to seek S corp class vacation so we now know that an S corp allows the members of an LLC to be treated as employees and earned both a salary and distributions before we look at the details of how these are taxed differently let's be clear about something the IRS wants to collect employment taxes they want to collect employment tax and they want to collect income tax let's look at how they do that in different scenarios first if you have a single member LLC you are taxed by default as a disregarded entity money passes through the LLC to you you cannot be an employee so your income is in the form of a distribution that distribution is subject to employment tax and income tax a multi-member LLC taxed by default as a partnership works the same way the income passes through is paid as distributions and those distributions are subject to employment tax and income tax if an LLC successfully becomes an escort then the members can be employees the income generated is paid to the members both as a salary and a distribution the salary is subject to employment tax and income tax the distribution however is only subject to income tax you do not have to pay employment tax on a distribution in an S corp and this is how you can potentially save money employment tax is around 15% and as stated the IRS is going to collect it but an S corp allows you to limit that employment tax to a reasonable salary amount while the rest of your income paid in the form of a distribution is only subject to income tax thus the main benefit of an S corp is that it saves you from paying self-employment tax on distributions now let's look at the drawbacks and complications there are three complications that may be drawbacks s corpse now that we know the benefits let's consider these three reasons you might not want to form an escort the first is salary the term used by the IRS is reasonable salary and this is the amount that as a member of the LLC turned S corp you will pay yourself in addition to distributions you must choose a reasonable salary as if you are hiring another person to do your job you can research this amount on sites like last or com but ultimately you are responsible for choosing this salary amount and the IRS has increased scrutiny of escort member of salaries if you pay yourself an unreasonably low salary whether by mistake or in an effort to pay less employment tax the IRS may take notice and engage your S corp status demanding back taxes and fines so be mindful when determining your reasonable salary secondly while the potential savings of an escort basically 15% of your distribution can be significant the reality of an S corp is that it requires more work there's an expenditure of effort on your part in terms of running payroll organizing a more complicated tax withholdings and so on and this increased complexity is going to require the cost and effort of a professional accountant we estimate the approximate added cost of properly running an S corp to be between one and two thousand dollars a year if the money you are saving not paying employment tax and this distribution is less than this amount it's probably not worth it specifically if your distribution is not more than ten thousand dollars it's not really worth the cost an effort of maintaining an S corp and finally there's the consideration of reinvestment if your company is successful and you know you're going to have a surplus of revenue you can choose what to do with that money some of the choices are suited for S corp and others not so much generally speaking an S corp will serve you best if you know you're going to make a lot of money in the form of distribution and you want to take all that money out of the LLC to pay yourself if that is the case an S corp is a good choice and will allow you to save employment tax on that large district however if you make a surplus of income and when I reinvest that amount into the company in the same year you made the money you are better off staying in LLC this will avoid unnecessary income and employment taxes lastly if you have surplus revenue that you want to carry over and reinvest into the company but not immediately perhaps over several years you may be best suited by a traditional corporation which is taxed as AC Corp let's keep this simple the main factor to consider is whether or not you have sufficient profit to justify escort classification if your distribution after paying yourself a reasonable salary is greater than ten thousand dollars you have sufficient profit to justify the cost and effort of an escort if you don't know how much profit your LLC is going to make it is pointless to become an escort to start off you can always change your tax status later if you know for certain you will have sufficient profit secondly escorts are a great choice if your intent is to withdraw all the profit from the company rather than reinvesting if you have other plans to reinvest your company profit LLC default tax status or C Corp classification may be more cost effective we hope this video has provided you with useful and actionable information regarding your LLC and your understanding of the S corporation tax classification we offer this as educational
Thanks handmadeB your participation is very much appreciated
- Randolph Beckes
About the author
I've studied analytical mechanics at Emory & Henry College in Emory and I am an expert in ethnology. I usually feel stressed. My previous job was desktop publishing specialist I held this position for 4 years, I love talking about amusement park visiting and whittling. Huge fan of ABBA I practice wrestling: greco-roman and collect insects.
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