S-Corps versus LLC

VIDEO TRANSCRIPTION – S-Corps versus an LLC. Which is best for your business? Hi, I’m Steven D. Cooper, also known as Coach Coop with Cooper’s Accounting Service, because your financial freedom matters.

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This is a very interesting topic that I answer, or we answer roughly three to five times a week. Why is it such a hot topic? A lot of people want to fling to LLCs because they believe that it’s better asset protection. We explain to our clients that it sadly depends. What do we mean by depends?

Well, if you are a single member LLC, that means that you are the only owner in an entity is technically a sole proprietorship. So the asset protection that you think that you’re getting, you’re not. But there is a great technique that we use to get you out of that. 

We convert you for tax purposes only, conducting business as an S-Corp.  that is exclusively designed for single-member LLCs. S-Corp. Its nickname is Small Business Corporation. All it means is it’s part of the IRS code sub-chapter S.

You can have up to 100 members or shareholders in an S corporation. Now, if every person is married, then technically you can have 200 shareholders in an S corporation. S corporation is a pass-through entity. What does pass-through entity means? It means that the corporation does not pay taxes it transfers onto your personal tax return via tax form K1. 

So you can have positive income or negative income. Negative income reduces your tax liability, positive income increases your tax liability. We suggest that you create what we call estimated tax payments if you have a significant higher K-1 income because there were no federal or state income taxes paid. With the LLC, LLC can be a single member LLC, as I said before. It can be a multi-member LLC. It can be treated for tax purposes as an S-corp, C-corp, or partnership. But in the LLC, we ask our clients this question, how many times do you wanna pay taxes?

Two or three? Well, most of them say zero, jokingly, but they go with two. Why? Well, no one wants to pay extra money in taxes. LLC if treated as a partnership, you pay a federal tax, which is referred to as self-employment tax. SE tax stands for self-employment or social security tax. That tax is technically 15.3 % at the federal level.

For my clients that live in California, you pay taxes on the gross income and you pay taxes on the net income. So LLCs may not be the entity for you. Another selection or option for a lot of my clients, especially when those clients have trust or multiple companies, an LLC ideally is perfect for a holding company.

I know that’s a lot of information that we gave just gave to you, but these are the options and this is what a tax advisor, what we should be telling our clients on the benefits of that. Another nugget, in the LLC partnership, you don’t pay yourself on the W-2. You pay yourself what’s called a dividend or draw.

And through that, if you do guarantee payments, guarantee payments are subject to self-employment tax using the LLC as a partnership. Also, going back to an S corporation, you can be subject to double double taxation. What does that mean? You can be paid as an employee, so you’re gonna pay tax as an employee, and you’re also gonna pay tax as the employer via through your K-1.

So if you are a U.S. citizen, you can elect to be both. If you have a partner that’s not a U.S. citizen, they cannot be a part of an S corporation. They can be a part of a C Corp or an LLC. LLCs do offer partners or members as people that are not residents of the United States.

For more easy financial tips, sign up for our financial newsletter by going to yourfinancialfreedommatters.com or click on the link below. You can also download our financial guide as well. If you like a free 20 minute smart money consultation, call us at 562-436-2600. Well again, I’m Steven D. Cooper, also known as Coach Coop with Cooper’s Accounting Service. Don’t miss our next video where we’ll cover is tax consultants worth it? See you next video.

 

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