Taxes can be daunting and scary to talk about. Understanding the LLC vs S-Corp differences in taxes is pretty important to keep yourself legal and profitable! In this episode I sit down with THE AWESOME Jacki Brown. She is a CPA based in Atlanta and we chat about what you need to do to position yourself in the good graces of the IRS and stay there!
Listen To the Podcast Now
Business entities
Three are a few business entities that you’ll be picking as a business owner. A sole proprietorship, partnership (not covering sub classifications LP, LLP), LLC,
C-Corp and S-Corp. Based on how you’ll be classifying yourself for taxes, choose a business entity that works with your business plan.
Income Tax classification
Your tax classification changes the rules about how you will need to file taxes. The different business entities each have their own classifications. For example, an LLC and an S-Corp are handled different but both have flow-through entity rules. You don’t pay income tax on the business (entity) level, you pay on the personal level. Basically, what you earn at the end of the year.
If you have more than one member (owner) of the entity, you’re automatically labeled as a partnership for tax purposes. There are no maximum level of members for an LLC while an S-Corp is capped at 100.
https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc
https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
Liability
Your liability is what you are on the hook for if something forces you into bankruptcy or a lawsuit. You are essentially protected when you create a Business Entity.
- Do not cross the “corporate veil”
- Business entity legally separate from its owners (create for liability protection or name recognition if Sch C business); entity liable, not owners or members
- May be different according to state of organization, so check on that
- Liability includes creditors/lender, customers, suppliers, or other owners
- Business assets used to pay off business debts, owners lose what has been invested in LLC, not personal possessions including house or car
- Exceptions include illegal or fraudulent activity
- Business liability and professional liability insurance should be considered
Formation
Each state has different rules about forming a Business Entity.
- State Articles of incorporation/organization $100 – Georgia
- State Annual registration and license $50 informational form – Georgia
- Federal employer ID # FEIN – Found on the IRS.gov website
- Partnership agreement is a good idea to complete even if you don’t have a partner. You never know where you business will grow.
Tax structure: LLC vs S Corp
- Both Flow Through Entities (FTE), so main difference is how business owners pay Self Employment (SE) taxes (Medicare and SS)
- LLC Pros: more flexibility in management (voting, ownership), distributing profits, and fewer recordkeeping obligations
- LLC Cons: pay SE tax on all income
- S Corp Pros: don’t pay SE taxes on net income (but have to take reasonable salary, typically understated)
- S Corp Cons: fewer than 100 members, no foreign LLC or nonresident alien owners, no corps or partnerships, basically only individuals;
- Proportionate distributions, take a reasonable salary which creates payroll filings
- S corp: pay reasonable salary on W-2 to owner which will pay medicare and SS taxes, that amount can be deducted from business profits, and remaining about is not subject to SE taxes, additional withdrawals taken as distributions
- Capital accounts (contributions, net income, separately stated items, TE income, ND exp, distributions)
- SE tax = 15.3%; SS 12.4% on first $118,500, Medicare 2.9%, (additional 0.9% on high income wage earners $250k Married Filing Joint(MFJ) and $200k single). Half deducted as above the line deduction when arriving at AGI
Tax filings
- Financial statements (BS, IS), open own checking/bank account and keep separate records
- Tax forms: 1040, 1065, 1120S, k-1s both
- Threshold: any activity, really when start earning income;
- Can deduct $5k each start-up and org costs (phased out over $50k), amortized SL over 15 years, 180 months
- Net earnings from SE => $400 sch SE filing
- Estimated tax payments => $1,000 total tax liability
- UET make sure to pay in 100% PY (110% if over $150k), 90% CY tax liability, actual or expected/annualized (70% GA)
- Due dates 1120s and 1065 3/15, 1040 4/15