how to choose between llc and s corp [New Research]

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Last updated : Aug 9, 2022
Written by : Cory Herscher
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how to choose between llc and s corp

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how to choose between llc and s corp

Comment by Mack Hingston

here's a question i get all of the time should i be an s-corp or an llc if you find yourself overwhelmed or confused with choosing between the two then this video is for you i just saved one of my clients over 95 000 in tax expenses for making a simple entity change from an llc to an escort we found out that they have been overpaying in taxes for years and here's the kicker if they would have chose the right entity to start with they'd have hundreds of thousands in tax dollars in their pocket businesses are overpaying in taxes every single year because of the entity they are choosing and it's because most people aren't analyzing the tax consequences associated with the entities they select heck a lot of people just follow the crowd and say i'll register as an llc and have no idea what extra taxes they are going to be paying so today i'm gonna put an end to this and help you choose between an llc or s-corporation for your business hey there i'm crystal with life accounting a full service accounting firm dedicated to helping small businesses get organized with their finances and grow their bottom line today i'm going to break down the similarities and differences between an llc versus an s corp especially the tax differences and what you could expect to pay in taxes with each type i'll also include some easy to follow examples of the taxes you pay by an llc and an escort i'll also outline the compliance requirements and how you can decide which one is best for your business i have personally helped small businesses literally save thousands of dollars by legally avoiding overpaying in taxes by choosing the right entity now to be fair i'm not a lawyer and i'm not giving you any legal advice but i am a licensed cpa and i will break down the gist of the legal jargon and especially focus on the tax items so you can avoid paying too much in taxes if you own a business then ensuring that you're properly structured to save the most in taxes is very important after all taxes are one of if not the biggest expense you'd have besides the tax implications of an llc versus an s-corp there are also legal considerations all of which and more i'm going to explain to you in this video make sure if you're new to our channel to subscribe down below so you don't miss out on future videos and also be sure to tap the like button if you learned anything from this video sound good okay let's dive in so why is entity selection or choosing between an llc and s corp so important the process of choosing the right entity for your business is one of the most important decisions you'll make as an entrepreneur for one the entity you choose plays a huge role in your personal liability in your company if you're ever faced with a lawsuit in addition to the legal aspect taxation is a major reason why choosing the right entity is so important simply put some entities pay more in taxes than others some even pay double taxation meaning you're taxed on the same money twice all in all you want to make sure you set yourself and your business up for success and choosing the right entity is key now if you want to know if you should be an s corp or an llc you first need to have a very clear understanding of what each is first let's start with an llc llc stands for limited liability company this means as an owner of an llc you are not personally liable for the obligations of the business for example if someone sues your company they cannot go after your personal assets if you have an llc in place both an llc and s corp provide you as the business owner limited liability other similarities between the two are pass-through taxation meaning the business itself does not pay income taxes and instead the business profits are passed through to the owners and the applicable taxes are paid at the individual level another similarity is the ability to form partnerships you can have a single member llc or a multi-member llc and the same is true for s-corps both give you the opportunity to have partners now let's get into some specific tax differences between the two llc owners are called members and members are typically paid distributions for tax purposes the irs assumes that all profits made in your llc has been paid to you as a distribution simply put you will pay taxes on all income made in your llc and you'll actually pay two types of taxes on your llc income the first being your regular federal and state income taxes remember the irs assumes that all of your llc profit has been paid to you as a distribution even if it wasn't and you'll owe federal and state income taxes based on that income and any other income you might have earned the us operates on a marginal tax bracketed system meaning the more you make the higher your tax rate the second type of tax you'll pay as an llc owner is self-employment tax this one hits a lot of business owners unexpectedly because they don't know about it the self-employment tax rate currently is 15.3 percent you might recall when you were an employee of a company taxes like fica or medicare being withheld from your pay it was roughly about 7.5 percent of your income your employer also had to pay roughly 7.5 of your income in fica and medicare as well in total it was roughly 15 percent being paid to the government in employment taxes well as a business owner the irs figures well hey you're both the employer and the employee and need to pay us the full 15.3 percent and their self-employment taxes were born there is a limit however to self-employment tax and currently it is a hundred and thirty seven thousand seven hundred dollars so you only have to pay fifteen point three percent of self-employment tax up to this amount any amount higher is taxed at 2.9 percent let's look at an example of an llc taxed as a sole proprietorship let's say you own abc llc and made profits last year of a hundred thousand dollars you would pay fifteen point three percent or fifteen thousand three hundred in self-employment tax in addition to your federal and state income taxes which is based on your taxable income and tax bracket so if you had taxable income totaling seventy thousand dollars you'd pay about eleven thousand dollars in federal taxes this does not include your state taxes in total as an owner of abc llc tax as a sole proprietor you'd pay at least twenty six thousand dollars in taxes annually or at least twenty one hundred dollars per month most business owners see the federal and state income taxes coming i can't say the same is true for self-employment tax so where does s-corp or llc taxed as an s-corp stand in all of this well to avoid the 15.3 percent in self-employment taxes on all of your llc profits many entrepreneurs opt to elect to be treated as an s corporation why as corporations don't pay self-employment taxes on distributions to owners however they do pay self-employment taxes on the salary paid to owners you see as an s-corporation owner you must structure yourself as an employee of the business and pay yourself what's called a reasonable salary and the self-employment tax is only based on your salary not the entire profits or distributions of the bu

Thanks for your comment Mack Hingston, have a nice day.
- Cory Herscher, Staff Member

Comment by Gussie

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 Gussie your participation is very much appreciated
- Cory Herscher

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