llc or corporation?

[limbhanger]

How do you guys run your business. After some research, I can not see the advantages of anything but a LLC type. Just wondering?

[Aproct]

Depends. I am starting out this year and I am a tax accountant. I am registering as an S-corp. Tax benefits, you are able to control the amount of taxes that are paid. If you go LLC, all of the activity will run through your 1040 schedule C. If the business is profitable, you will have a 15% self employment tax to pay. You do get half of it as a deduction on the front of your 1040. If you are looking at the liability of the company and yourself, you can't go wrong with a S-corp. Everything is in the business name. The LLC is a little easier and costs a little less than filing for S-corp, but depending on who does it, the cost is limited.

The only down fall to an S-corp is that you will have t start taking a salary. You could possible get away without taking one for a year or so, but then the IRS will start to question. Then there is the draws you can take on the LLC. A lot of different things could weight your decision.

If you want to talk more outside, PM me.

[Scaper-S2k]

You can take draws from the S-corp as well.

Also, with both, the profits flow through to your personal income, not just with the LLC.


You should really pay yourself a salary with the LLC as well.

[Phil Nilsson]

I am starting out this year and I am a tax accountant

Aproct,
The above being the case you are a great resource to have at this site. Let's talk accounting sometime.

Phil

[Aproct]

Yes, you can take a draw from the S-corp, but whenever a draw is taken you have to be careful. The draw is offset against your "basis" in the company, basically how much you put into the company to start it. If you take out more "draw" than what you have in basis, you will have to classify the excess as a capital gain. Also, the S-corp is much more flexible. If you decide to sell a portion of the business to someone and make them a shareholder, you can without having to draw up a new agreement and so forth.

Yes, the income from the LLC and the S-corp does flow to your personal income taxes, but there is a difference in the way it is presented.

Personally, I elect for the S-corp. But that is just my two cents.

Phil, any time you want to talk, just give me a shout. Besides setting up my own LCO business, I am working with the other newbies in my area to get them set up in the right direction and take care of there taxes. I love saving people money. I hate to see Uncle Sam get a hard working person's money!!

[Phil Nilsson]

Aproct,

Sounds like you might be ready to go on the seminar circuit ... presenting tax strategies.

Phil

[MEvans857]

s-corp llc????????

Not to sound like an idiot but can anyone explain what you guys are talking about? I have not registered (with who) as eaither? I have a feeling when I get to tax time it's going to be a pain for me now eaither way.

[Aproct]

Phil,

Seminars????Nay, just trying to lead any other LCO out there in the right direction. I have seen it many of times, people come to you after it is to late to do anything and ask you, the tax man, to fix their tax issues. Like you are a miracle worker and you wave a wand and the tax liability goes away.

One thing I can say, everyone will be out there looking for someone to help them out with there taxes. I have seen the LCOs ***** about how much the accountants want per hour. Well put the shoe on the other foot, how would you feel if I want you, the LCO, to come and pull weeds or cut my grass for $3/hour? I already know the answer, but just think about it. PearceTurf knows this first hand since he has mentioned numerous times that his wife is a CPA. I am sure he wouldn't want his wife out doing accounting services for only $10/hour. We, being accountants and LCOs are all in the service business. We all want what is due to us and what we think we are worth per hour. Each side has there scrubs. It is important that you find an accountant that is familiar with your industry, but it isn't highly necessary. This business has accounts receivables, bad debts, expenses, revenues, materials and equipment. All the same accounting principles apply. It may not be necessary to obtain an accountant for every month, but I WOULD HIGHLY RECOMMEND that an accountant be obtained for the initial setup of what ever type of business registration that you may decided, whether it be an LLC, S-Corp or sole prop. This is necessary because it will cost you a lot more $$ later to fix any prior decisions. Then forward depending on your accounting needs, the accountant may only be need on a monthly basis depending on the complexity of your bookkeeping, tax filings and so forth.

Sorry to run on like this, but I have seen things like this happen way to many times!

[Scaper-S2k]

Aproct, I wasn't disagreeing with you. I went S-corp instead of LLC also.

[Aproct]

MEvans857,

I thought someone would have responded to you by now. Since no one has, here goes:

An LLC stands for a Limited Liability Corporation. Some people opt for this election due to cost for start up, reporting effort and the liability is limited to the business, unlike a general partnership or a limited partnership. Liability is expressed as a possible lawsuit or damages. An S-corp is a stand alone corporation. Once you register, you can than add "Inc." to your company name. The S-Corp has a seperate tax return prepared as compared to the LLC which is prepared as a schedule C on the individuals tax return. Not that big of an issue, but just easier if you prepare a seperate tax return for the S-corp and than just bring over one line item to your personal return. As was mentioned before, you can take a draw from each of the entities, but with the S-Corp you could classify the draw as a bonus and pay the necessary taxes on it.

Not saying that one election is better than the other, but you need to decide what your plans are for the future for your business and decide which avenue will be the best for you.

P.S. I know this is very broad as to descriptions, but hopefully this will give you some idea.

[MEvans857]

Aprot,

I would have thought so too. Thank you for at least taking the time! I would have to assume that most would opt for the S-Corp & I would think getting the inc. would be a must for anyone. I just don't see many advanatges with the LLC route

[Scaper-S2k]

MEvans857,

Even though I went with the S-corp, there are many, many that go LLC. It is easier. And I would think that 98% of all green industry companies that incorporated could be LLC with no problems at all. It really depends on your situation, but I would think the LLC would be just fine for most. Especially if you didn't plan on being a huge multi-million dollar company.

Good luck.

[MEvans857]

Thanks, to both, I'm still not real clear on the differance between the two just because I'm not very good in that area just yet, and I don't really understand alot when it comes to taxes???????????

[Aproct]

MEvans857

If you are small, it really isn't that big of a deal to decide which one to register as. But if you plan on looking at a 5 year plan you may want to go S-corp. The issue is taxes. Under an S-corp, you can elect to go accrual method of accounting, which you should be. Under this there are some advantages to end of year tax planning and so forth. The seperate tax prep will also assist in leaving the accrual basis (being the business) seperate from you cash basis tax return. Only two or three numbers will come over to your tax return. Where as the LLC, depending on the complexity, may require the account to convert your year end information from accrual to cash basis since it is merging over to schedule c of a cash basis tax return. I know I probable lost you on that explanation. You have to decide if you want to be a cash basis company, meaning that you have no accounts receivables, no accounts payable, you recognize the income that you earned when you receive actual payment and not when you did the work and billing later for it. If you go with an accrual basis everything I just said is the opposite.

I hope this helps.

[leadarrows]

I have Kiplinger's small Business software. This is what they have too say.
Chapter 11: The Form of Your Business


Corporations—The Pinnacle of Protection


Unlike sole proprietorships and partnerships, corporations are legally considered separate entities from the people who operate or own them. This gives entrepreneurs
who form corporations far more legal protection against personal liability than those who operate as sole proprietors or partnerships. All you can personally lose is the
money and time you've put into the company. (Of course, this doesn't protect people who use their business to purposely trick or defraud creditors.) Your house, car
and personal bank accounts are safe, even if your corporation is sued or goes bankrupt. That's a big difference from the unlimited liability that sole proprietorships and
partnerships can face.

"If you're going to have employees, you're crazy not to be incorporated," says Jim McGrath, a financial planner and certified public accountant in Rockville, Md. "At
least if you're incorporated, your personal assets are protected from problems with employees' either being injured or causing damage to someone else's property;
things like that become the company's problem and not yours."
There are a couple of exceptions to the general rule that incorporation protects you against business debts and liabilities:

In case of a loan

First, even if you incorporate, banks are still likely to ask you to personally co-sign any loans, pledging your house, car or other personal assets as collateral.

You don't live up to the rules

Second, you can lose the legal protection of a corporation if your firm does not act like a corporation. Corporations have to adopt bylaws (rules for conducting the
business of the organization), keep financial and business records, and conduct themselves as the independent entities they are.
For you, that means (among other things) not mixing the corporation's finances with your own. You have to have separate checking accounts, separate savings
accounts and separate tax returns if you are going to be truly separate entities. Writing a company check to your personal account when you need a little extra
money is strictly a no-no, unless the corporation formally makes a loan to you. If you don't conduct your personal financial affairs separately from the finances of the
corporation, creditors and the IRS may try to have you declared personally liable for the corporation's debts. Of course, keeping your personal and business finances
separate is a good idea from a tax and record-keeping standpoint even if you're not a corporation.

"Unless the corporation is maintained in good standing and as a genuine business entity, a creditor can ignore the corporate structure and `pierce the corporate veil,'
as lawyers say, to get at the assets of the owners," says Kirsch. "The greatest mistake I'd say that entrepreneurs make is to incorporate and then ignore the
corporation and continue to do business as if they were a sole proprietorship. They don't hold annual meetings, they don't elect officers, they don't keep minutes of
meetings, and so on."

States license corporations and specify the rules covering incorporation, including those covering election of directors, conduct of meetings and records of corporate
decisions.
Incorporating isn't cheap: Depending on where you live and the complexity of the corporation you're starting, it can cost anywhere from several hundred to several
thousand dollars to pay the state fees and have a lawyer draw up and file all the necessary paperwork.


I'm Incorporated. My accountant highly recommends it. I did all the filing myself using this software and my accountants guidance as necessary. Cost me less than two hundred including the price of this software I believe it's worth it. That 15% self employment tax is a killer.

S corp is the way to go.
Kiplinger's slant on this.


S Corporations



Background
An "S corporation" is a closely held corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code, instead of the rules of Subchapter C that generally govern taxation of corporations.
S corporation election does not modify any of the laws and rules concerning liabilities or legal obligations of corporate directors, officers or shareholders. Other than the way in which S corporations and their
shareholders are taxed, S corporations are subject to all of the issues and obligations, and have all the benefits and rights of, any other corporation.


Avoid Double Taxation
A corporation is considered to be a tax paying entity separate from its shareholders. Most corporations are taxed as C corporations. A C corporation must file returns and pay taxes on its income. When the
corporation distributes some of its income to shareholders as dividends, the shareholders must pay income tax on the dividends. The income the shareholders receive is therefore taxed twice, once at the
corporate level when the corporation receives it, and again at the shareholder level when the shareholders receive it. This "double taxation" is one of the drawbacks to C corporation status.


On the other hand, S corporations are treated differently. They avoid "double taxation." If an eligible corporation and its shareholders elect to be taxed as an S corporation, the corporation is treated as "pass
through" entity (very much like a partnership). All corporate income is "passed through" to the shareholders. The S corporation does not pay a corporate income tax. The income is taxed only at the shareholder
level. Likewise, all losses, deductions and credits are passed through to the shareholders and must be included on the shareholders' tax returns in the same form that those items are received, paid or incurred
by the corporation.


Qualifying as an S Corporation
To qualify as an S corporation, the corporation must be a "small business corporation" as defined in the Internal Revenue Code. To qualify as a small business corporation, there may be no more than 35
shareholders, there may be only one class of stock, and the corporation and the shareholders must properly and timely file an election with the Internal Revenue Service and meet other requirements.

While the benefits of S corporation status are in many cases significant, to receive those benefits the corporation and the shareholders must comply with the Internal Revenue Code and related regulations, and
keep and maintain appropriate books and records. Also, S corporation status may be beneficial to some shareholders but not all. Before making an S corporation election, consult with an attorney or
accountant well versed in the S corporation requirements and benefits. Other business forms, in particular a limited partnership or a limited liability company, may provide comparable tax benefits without some
of the disadvantages of a limited liability company.


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