Corporation or LLC??

[pride]

Hey guys,

I'm doing some business restructuring and expanding so we are looking at the advantages of becoming an LLC, it seems a lot easier than a corporation without the paperwork hassel of corporation. What are your opinions and what have you found beneficial with the business structure you are?

[rat_race_engineer]

At least in NJ, a single member LLC is the way to go when you're just starting out. IRS treats it just like a sole proprietorship at tax return time and the tax returns are much simpler to prepare. Multiple member LLCs are a different story. According to my CPA, the single member LLC is the way to go and then if your business expands (lots of customers, multiple divisions, etc) it is relatively easy to turn a single member LLC into a corporation. Got all of this from my CPA who told me the cost of preparing a tax return for the LLC would be "in the hundreds" as opposed to preparing them for a corporation which would be "in the thousands".

All of this is what I've found for NJ but I am no accountant. The best advice is to meet with a CPA and discuss it. Most will offer a free consultation/meeting as your first visit.

Good Luck,

rat_race_engineer

[Phil Nilsson]

What rat race said ...

[Scaper-S2k]

Rat race, I started a S-Corp 5 years ago and my taxes don't run in the thousands at all.


And with the LLC you still need to pay the self employment taxes and such. That alone is around 15% or so. Not with an S-corp. There are also more possible deductions with the S-Corp. And it all flows through to the primary share holder as well, and is not double taxed like a C-corp.

Many times if you asked 12 CPA's, 6 would say LLC, 6 would say S-corp. It's almost a toss up.




Having said all of that, for the average lawn care company, LLC is 'probably' the best way to go. Then maybe the S-Corp. C-corp's should not be considered.

[SodBuster]

S-Corp owners pay self employment taxes on payment or compensation for services, which must be reasonable for what you're doing and the entire amount received is subject to income taxes. Additionally, s-corp benefits taken are considered ordinary income, the corp takes the deduction but the expense is added back to your gross income, which is then taxed as regular income.

[rat_race_engineer]

Thanks for the input. My CPA was only speaking of his cost to prepare a tax return for an LLC (in the hundreds) vs his cost to prepare them for a C-Corp (in the thousands). He did indicate that the S-corp would most likely be the next step after the single member LLC has "grown up". He also told me he represents a few other LCO companies in the area. I was glad to hear he was familiar with the industry.

rat_race_engineer

[Scaper-S2k]

Sodbuster, you are correct about paying yourself a reasonable salary and being taxed on that amount. What I should have also said was that you can take a lot above that as draw or distribution and it isn't taxed the 15.3%. Which can amount to a lot after you become established. That's why I do feel the LLC is okay for most. But once you get into the big bucks (Or Plan To), possibly consider S-corp. I would think that would benefit you as well. I realize you know about the following, I'm just copying it from a site for others.



"A major factor that differentiates an S corp from an LLC is the employment tax that is paid on earnings. The owner of an LLC is considered to be self-employed and, as such, must pay a "self-employment tax" which goes toward Social Security and Medicare. The entire net income of the business is subject to this tax at a rate of 15.3%.

In an S corp, only the salary paid to the employee-owner is subject to employment tax. The remaining income that is paid as a distribution is not subject to employment tax under IRS rules. Therefore, there is the potential to realize substantial employment tax savings. Case in point:

Mary owns a print shop. In keeping with the industry standard, Mary decides that a reasonable salary for a print shop manager is $35,000 and pays herself accordingly. Mary’s total earnings for the year are $60,000: $35,000 paid in salary and the remaining $25,000 paid as a distribution from the S corp. Mary’s total employment tax is $5,355 (15.3% of $35,000).

If Mary were the owner of an LLC, she would have to pay employment tax on the entire $60,000, equaling $9,180. But as an S corp, she pays it only on the first $35,000."

[SodBuster]

The s-corp single class of stock rule constrains the allocation of tax attributes like income, deductions and distributions. Complex tax adjustments to suit an individual’s tax situation are not available under s-corp status. These effects reduce the taxable amounts to llc members. In the end game, llc outscores status s-corp because llc can choose partnership tax status.

At first glance, s-corp allows a reduction in the amount of self employment tax, but any reduction in self employment tax is only skin deep. The s-corp employment tax on benefits negates the possible self employment reduction on the front end. In most cases, temporary self employment tax savings are washed.


Tax advantages of llcs, as compared to s- corp, are the tax advantages of partnerships pure and simple. No other form of entity allows the flexibility of llcs. The shifting of income, distributions and deductions has a large impact on the total taxable amounts realized then recognized. The ability to adjust your basis to suit your individual tax situation is a clear advantage.

Not that s-corp form is useless, rather s-corp form is not as advantageous for aggressive business owners.

[Phil Nilsson]

Tax advantages of llcs, as compared to s- corp, are the tax advantages of partnerships pure and simple. No other form of entity allows the flexibility of llcs.

What SodBuster said ...

[Scaper-S2k]

I didn't know this was a debate. I clearly said MOST lawn care companies should go LLC. BUT, S-corp's have their advantages, if they didn't, they wouldn't exist.

LLC's are more flexible, no doubt (but only if you are a partner). Many states actually REQUIRE partnerships to start LLC's. Some people don't want to be partners.

The tax advantage for LLc's is that one partner can come to the table with $100k, the other with $25k, and they can divide the profit in those percents if they like.


LLC's are more designed for partnerships than the S-corp.

If you have no intention of a partnership, and take large sums of money as a draw (after you pay yourself a reasonable salary), the S-corp does have it's advantage.


If it didn't, there would be no such creature. Sodbuster, there have actually been many changes in the laws for the S-corp fairly recently.

[Phil Nilsson]

LLC status leaves one "loose as a goose" ... flexibility is the name of the game for most small LCO's (and most are small) ... a place for S Corps and others? ... sure ... one size does not fill all.

The world of black or white stances leaves one with yes or no answers in a world that needs room for the "maybe" ... now, later, eventually and does it really matter ... right now? ... I don't know and I don't care.

[PTLlandscapingIL]

IM listed as a sole propier, for right now and i have my insurance as i grow im gonna go llc after doing alot of reserch

[SodBuster]

LLCs hold the advantage and it's clear to anyone who has understandings of even the most basic tax implications. The idea of avoiding self employment tax on the s-corp distribution is illusionary. In most cases, it is not likely that the s-corp form would result in lower self employment taxes unless no tax planning or tax strategies are used.

The LLC attributes are unequalled and it's silly to think otherwise and be in denial of the situation.

[Scaper-S2k]

It's funny you say that Sodbuster. Friday and today I have had to meet with my Certified Public Accountant. I had her read this thread today on my laptop. She kind of chuckled a bit and said "Yes, the LLC is great for the lawn care biz. But so is the S-corp if you have different plans in the future, or higher expectations, or the state doesn't allow one person to start the LLC."

She also said you were missing the point that many states actually REQUIRE you to have a partner to form a LLC, which many don't want to do, so they must go S-corp.

She also informed me that many states require you to have a set date of when the biz will actually terminate for the LLC. On that date, the biz ends. And if you die, so does the biz.


And she REALLY got a laugh out of your statement.......
"it is not likely that the s-corp form would result in lower self employment taxes unless no tax planning or tax strategies are used."

She laughed because "It actually IS the good tax strategy!" Because over 50% of the money you earn could save at least 15%. That's actual personal spending money.


She thinks you should check up on the recent changes for the S-corp, and wants you to understand that LLC laws vary by state.


BUT, again, she did say that for the AVERAGE lawn care company, the LLC is probably the best way to go. But there are good reasons for the S-corp as well.


She didn't say anything about you getting all defensive, but I'm sure she thought about it. Ease up Dawg. People are agreeing here! I'm amazed that you don't see that!

[Phil Nilsson]

It's like SodBuster said ... LLC is the best way to go ... the guy is a CPA and a great asset to the forum. Not that many CPA's around that would take the time to give free, expert advice.