hno:
bb in short......think of it like this:
if you make $100k (net) as a sole prop (or LLC taxed as a sole prop), then the entire $100k is subject to SE tax (equivalent of payroll taxes)....there are rough calcs, but it is basically 15.3% of your first $100k (limits change every year)....this is in ADDITION to the fact you have to add the $100k as income on your tax return.
If you have an S-Corp, you will HAVE to take salaries as a shareholder (and essentially pay the same 15.3% on that amount) but you do not have to take the entire $100k as salaries.....basically if you only take $50k as salary, the other $50k isn't subject to the SE tax.
(either way you are reporting $100k on your individual tax, just in option 2, 50k is W-2 and 50k is via K-1)
if you make $100k (net) as a sole prop (or LLC taxed as a sole prop), then the entire $100k is subject to SE tax (equivalent of payroll taxes)....there are rough calcs, but it is basically 15.3% of your first $100k (limits change every year)....this is in ADDITION to the fact you have to add the $100k as income on your tax return.
If you have an S-Corp, you will HAVE to take salaries as a shareholder (and essentially pay the same 15.3% on that amount) but you do not have to take the entire $100k as salaries.....basically if you only take $50k as salary, the other $50k isn't subject to the SE tax.
(either way you are reporting $100k on your individual tax, just in option 2, 50k is W-2 and 50k is via K-1)
As you saw I am starting my own company as well. I was advised if I was going to have losses in the first 2/3 years to file as an LLC and then you can change elect corporate status and change to an S corp. S Corps have much more stringent record keeping and reporting than LLC's do. Does this sound right?
LLC's can be S-Corps, Partnerships, or Sole Proprietors (for tax purposes)...if there is only one owner then obv partnership is not an option.
Technically, yes, all corporations have requirements that usually require the use of attorneys (i.e. meeting minutes, etc.). AFAIK, LLC taxed as a sole proprietorship only needs articles and they are good to go. realistically, i have never seen someone ask for a small business owner's (taxed as an S-Corp) record keeping (legal documents).
It is MUCH easier to start as an LLC (taxed as a sole proprietor) and later elect an S-Corporation filing status......than to go from S-Corp to anything else.
Form 2553 is due by the 15th day of the third month of your accounting year (march 15 for calendar year) this is the form to elect to be an S-Corp.
If he will do it for $50 that is a good deal and I would let him do it.
As far as saving social security tax shdw has covered it pretty well. With an LLC there are no wages for owners instead of wages you have guaranteed payments which are subject to self employment tax along with the income allocated to you from the LLC so all the income is basically subject to SE tax.
With an S-Corp you pay yourself the going rate for the work you are doing. And the rest will be ordinary income not subject to SE.
At one time I was a controller of a small business with profits of $6,000,000 with two owners owing 50% each. I paid them the pension max on w-2 each year about 200k each and the rest was cash distributions which were not subject to se tax. So you can see how an S-corp can save lots of SE tax.
thanks for the info..great post that will help many. My wife and I filed for the LLC today so we will have 2 members. We have sent our accounant the question about setting up individual sole p's.
Also guys, I highly recommend anyone starting a company to look into the FREE advice from the SBDC. We met with a counselor today. Retired, owned his own company and was a wealth of knowledge. He is reviewing biz plan, budgets and will help put together our loan ap and guide us through the first year. Really a great program.:toast:
Also guys, I highly recommend anyone starting a company to look into the FREE advice from the SBDC. We met with a counselor today. Retired, owned his own company and was a wealth of knowledge. He is reviewing biz plan, budgets and will help put together our loan ap and guide us through the first year. Really a great program.:toast:
