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Pros/Cons of an S-corp vs. LLC for a handyman/repairs business
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NPOguy
Feb 16, 2012, 1:26:02 PM2/16/12
to
For someone who wants to create an entity for their handyman/home-repairs
business, what are some of the pros and cons of setting it up as an S-corp
vs. an LLC?
I know, of course, that one should talk with an accountant and attorney
about the specifics of the situation. But, I would appreciate any thoughts
or feedback on the pros and cons of each type of entity that anyone here
could provide or suggest. In this particular situation, whether it is an
LLC or an S-corp, there would only be one owner. Also, this would be in New
Jersey.
In general, my thinking is that a single-member LLC would be less
complicated than and S-corp to operate and maintain. On the other hand, if
it is set it up as an S-corp, I think that customers wouldn't have to worry
about or deal with having to issue 1099's to the company because 1099's are
not required for payments to corporations. I am not sure, but I think that
if someone sets an entity up as a corporation, and then elects to make it an
S-corp, they don't have to deal with the issue of "double taxation" since
the S-corp would be a pass-through entity as far as income taxes are
concerned. And, I think the total net cost of social security, workers
comp, etc. would end up being about the same to the owner of the entity
whether it is an LLC or an S-corp. Is that correct, or am I way off on
this?
--
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<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
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<< ------------------------------------------------------- >>
business, what are some of the pros and cons of setting it up as an S-corp
vs. an LLC?
I know, of course, that one should talk with an accountant and attorney
about the specifics of the situation. But, I would appreciate any thoughts
or feedback on the pros and cons of each type of entity that anyone here
could provide or suggest. In this particular situation, whether it is an
LLC or an S-corp, there would only be one owner. Also, this would be in New
Jersey.
In general, my thinking is that a single-member LLC would be less
complicated than and S-corp to operate and maintain. On the other hand, if
it is set it up as an S-corp, I think that customers wouldn't have to worry
about or deal with having to issue 1099's to the company because 1099's are
not required for payments to corporations. I am not sure, but I think that
if someone sets an entity up as a corporation, and then elects to make it an
S-corp, they don't have to deal with the issue of "double taxation" since
the S-corp would be a pass-through entity as far as income taxes are
concerned. And, I think the total net cost of social security, workers
comp, etc. would end up being about the same to the owner of the entity
whether it is an LLC or an S-corp. Is that correct, or am I way off on
this?
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
Gene E. Utterback, EA, ABA
Feb 16, 2012, 4:40:30 PM2/16/12
to
>"NPOguy" wrote in message news:jhjatf$eq2$1...@speranza.aioe.org...
>For someone who wants to create an entity for their handyman/home-repairs
>business, what are some of the pros and cons of setting it up as an S-corp
>vs. an LLC?
>
>I know, of course, that one should talk with an accountant and attorney
>about the specifics of the situation. But, I would appreciate any thoughts
>or feedback on the pros and cons of each type of entity that anyone here
>could provide or suggest. In this particular situation, whether it is an
>LLC or an S-corp, there would only be one owner. Also, this would be in
>New Jersey.
>
>In general, my thinking is that a single-member LLC would be less
>complicated than and S-corp to operate and maintain.
Not necessarily. The general rule is that you need to keep GOOD RECORDS.
Good records are good records regardless of whether you're a Schedule C, C
Corp, S Corp, LLC, or a Trust.
> On the other hand, if it is set it up as an S-corp, I think that customers
> wouldn't have to worry about or deal with having to issue 1099's to the
> company because 1099's are not required for payments to corporations.
Not necessarily - 1099s are required to be issued when someone is paid
during the normal course of BUSINESS. So if you come to my HOME to fix my
washing machine it matters not a lick what I pay you, it was NOT part of MY
BUSINESS so no 1099 would be required. On the other hand, if you came to MY
OFFICE to fix my furnace I'd have to issue a 1099 to you if were anything
OTHER than a corporation.
>I am not sure, but I think that if someone sets an entity up as a
>corporation, and then elects to make it an S-corp, they don't have to deal
>with the issue of "double taxation" since the S-corp would be a
>pass-through entity as far as income taxes are concerned.
This is correct, but may be meaningless. When you have a corporation you
have to take a REASONABLE SALARY, assuming the corp is operating at a
profit. Payroll taxes (15.3%) themselves can be equal to or more than the
"double taxation" you'd face if you were a C corp and distributed qualified
dividends that get taxed at 15%.
An S Corp owner can take some of his money out as a distribution of profit.
BUT the IRS is taking exception in certain circumstances - some of which I
agree with and some of which I don't. For example, if you were a
professional S Corp (doctor, lawyer, accountant, engineer, IT, Consultant,
Artist) and company income is the result of the efforts of THREE OR FEWER
owners/employees, the IRS is trying (operative work is TRYING - the tried
and failed to pass this last year and I fear it will come back to haunt us)
to subject profit distributions to Self Employment taxes. Likewise, some
tax pros argue that if there is ONLY one employee that all the profit MUST
be the result of that person's efforts, hence they think that all money
taken should be treated as payroll.
>And, I think the total net cost of social security, workers comp, etc.
>would end up being about the same to the owner of the entity whether it is
>an LLC or an S-corp. Is that correct, or am I way off on this?
Maybe, see my comment above.
Whatever you do, form the company in the same state you're going to MOST or
ALL of your work in. Many people think if they form in "Tax Free Nevada"
that they don't have to pay tax - NOT TRUE. You have to file and pay tax
for any state that you work in (that has an income tax) regardless of where
you're formed. Plus you'll have to register to do business in each state
you work in.
A few other things to consider -
A) if its only you and no one else, no employees - either a single member
LLC or a Schedule C means you will NOT have to run payroll for yourself. If
you set up either a C or S Corp you'll need to run payroll;
B) LLC members and Schedule C sole proprietors are NOT allowed to take
payroll, so you'll have to make estimated tax payments. Some folks find it
hard to SAVE UP the money and make only 4 estimated tax payments. If you
need budgeting help being on payroll can mean MONTHLY instead of quarterly
payments. Some folks find it easy to send in the money more frequently
because its easier for them to accumulate the cash;
C) a single member LLC is a disregarded entity. As such it files a Schedule
C. Schedule C owners pay Self Employment tax on the NET INCOME from the
business EVEN if there is no income tax because of itemized deductions. So
you have no ability to even consider distributing some of the money as
profit NOT subject to payroll or SE tax;
D) Corporations are subject to more strict state compliance rules than
LLCs - GENERALLY. For example, Maryland says ALL corporations MUST hold an
annual meeting of the directors/stockholders - even if it is just YOU. BUT
LLCs don't have to have that meeting. NOTE - that does not mean that having
the meeting is bad idea. I recommend all my business clients have an annual
meeting to record decisions. This stuff comes in handy during an audit by
the taxing authorities.
There a host of other items - I actually have a 33 Item list of the
different attributes and how they play out for different entities. Were you
a client of mine I could supply you with that list. NOTE - this is NOT a
solicitation for work. It’s a statement that most good tax pros consider
various factors when a business is being formed and very few of us do it for
free.
Good luck,
Gene E. Utterback, EA, RFC, ABA
>For someone who wants to create an entity for their handyman/home-repairs
>business, what are some of the pros and cons of setting it up as an S-corp
>vs. an LLC?
>
>I know, of course, that one should talk with an accountant and attorney
>about the specifics of the situation. But, I would appreciate any thoughts
>or feedback on the pros and cons of each type of entity that anyone here
>could provide or suggest. In this particular situation, whether it is an
>LLC or an S-corp, there would only be one owner. Also, this would be in
>New Jersey.
>
>In general, my thinking is that a single-member LLC would be less
>complicated than and S-corp to operate and maintain.
Good records are good records regardless of whether you're a Schedule C, C
Corp, S Corp, LLC, or a Trust.
> On the other hand, if it is set it up as an S-corp, I think that customers
> wouldn't have to worry about or deal with having to issue 1099's to the
> company because 1099's are not required for payments to corporations.
during the normal course of BUSINESS. So if you come to my HOME to fix my
washing machine it matters not a lick what I pay you, it was NOT part of MY
BUSINESS so no 1099 would be required. On the other hand, if you came to MY
OFFICE to fix my furnace I'd have to issue a 1099 to you if were anything
OTHER than a corporation.
>I am not sure, but I think that if someone sets an entity up as a
>corporation, and then elects to make it an S-corp, they don't have to deal
>with the issue of "double taxation" since the S-corp would be a
>pass-through entity as far as income taxes are concerned.
have to take a REASONABLE SALARY, assuming the corp is operating at a
profit. Payroll taxes (15.3%) themselves can be equal to or more than the
"double taxation" you'd face if you were a C corp and distributed qualified
dividends that get taxed at 15%.
An S Corp owner can take some of his money out as a distribution of profit.
BUT the IRS is taking exception in certain circumstances - some of which I
agree with and some of which I don't. For example, if you were a
professional S Corp (doctor, lawyer, accountant, engineer, IT, Consultant,
Artist) and company income is the result of the efforts of THREE OR FEWER
owners/employees, the IRS is trying (operative work is TRYING - the tried
and failed to pass this last year and I fear it will come back to haunt us)
to subject profit distributions to Self Employment taxes. Likewise, some
tax pros argue that if there is ONLY one employee that all the profit MUST
be the result of that person's efforts, hence they think that all money
taken should be treated as payroll.
>And, I think the total net cost of social security, workers comp, etc.
>would end up being about the same to the owner of the entity whether it is
>an LLC or an S-corp. Is that correct, or am I way off on this?
Whatever you do, form the company in the same state you're going to MOST or
ALL of your work in. Many people think if they form in "Tax Free Nevada"
that they don't have to pay tax - NOT TRUE. You have to file and pay tax
for any state that you work in (that has an income tax) regardless of where
you're formed. Plus you'll have to register to do business in each state
you work in.
A few other things to consider -
A) if its only you and no one else, no employees - either a single member
LLC or a Schedule C means you will NOT have to run payroll for yourself. If
you set up either a C or S Corp you'll need to run payroll;
B) LLC members and Schedule C sole proprietors are NOT allowed to take
payroll, so you'll have to make estimated tax payments. Some folks find it
hard to SAVE UP the money and make only 4 estimated tax payments. If you
need budgeting help being on payroll can mean MONTHLY instead of quarterly
payments. Some folks find it easy to send in the money more frequently
because its easier for them to accumulate the cash;
C) a single member LLC is a disregarded entity. As such it files a Schedule
C. Schedule C owners pay Self Employment tax on the NET INCOME from the
business EVEN if there is no income tax because of itemized deductions. So
you have no ability to even consider distributing some of the money as
profit NOT subject to payroll or SE tax;
D) Corporations are subject to more strict state compliance rules than
LLCs - GENERALLY. For example, Maryland says ALL corporations MUST hold an
annual meeting of the directors/stockholders - even if it is just YOU. BUT
LLCs don't have to have that meeting. NOTE - that does not mean that having
the meeting is bad idea. I recommend all my business clients have an annual
meeting to record decisions. This stuff comes in handy during an audit by
the taxing authorities.
There a host of other items - I actually have a 33 Item list of the
different attributes and how they play out for different entities. Were you
a client of mine I could supply you with that list. NOTE - this is NOT a
solicitation for work. It’s a statement that most good tax pros consider
various factors when a business is being formed and very few of us do it for
free.
Good luck,
Gene E. Utterback, EA, RFC, ABA
removep...@yahoo.com
Feb 17, 2012, 2:25:52 PM2/17/12
to
On Feb 16, 1:40 pm, "Gene E. Utterback, EA, ABA"
favorite search engine. That's just to get started. The information
from a pro will be better.
> >In general, my thinking is that a single-member LLC would be less
> >complicated than and S-corp to operate and maintain.
>
> Not necessarily. The general rule is that you need to keep GOOD RECORDS.
> Good records are good records regardless of whether you're a Schedule C, C
> Corp, S Corp, LLC, or a Trust.
That's true. Get a separate bank account, separate credit cards, etc
for your Schedule C business or single member LLC.
Two nice things about single member LLC are that: You don't have to
file 1120-S which is due by 3/15 and will cost more than just adding a
Schedule C to your normal individual tax return; you get a deduction
for one half of self-employment tax which makes your federal and state
tax less.
> D) Corporations are subject to more strict state compliance rules than
> LLCs - GENERALLY. For example, Maryland says ALL corporations MUST hold an
> annual meeting of the directors/stockholders - even if it is just YOU. BUT
> LLCs don't have to have that meeting. NOTE - that does not mean that having
> the meeting is bad idea. I recommend all my business clients have an annual
> meeting to record decisions. This stuff comes in handy during an audit by
> the taxing authorities.
I think CA passed such a law recently as well. Also in CA,
corporations don't have to pay the $800 minimum tax in the first year,
but LLC's have to. In the second year, both LLC and S corps have to
pay the $800 minimum tax -- even if the corporation/LLC has a loss!
In addition, in CA distributions from the corporation are subject to
an additional 1.5% of tax, which matters if the corporation makes a
lot of money -- say you take a distribute of $10,000 -- so 1.5% is
just $150 and you have to pay an additional $650 to meet the $800
minimum so it doesn't matter because you have to pay at least $800,
but if you take a distribution of $100,000 -- then 1.5% is $1500 so
you pay $700 in addition to the $800 minimum tax. And if you're an
LLC you have to pay a fee based on the profits you make. These
additional tax considerations are in CA only.
<G...@AllianceTax.Com> wrote:
> >For someone who wants to create an entity for their handyman/home-repairs
> >business, what are some of the pros and cons of setting it up as an S-corp
> >vs. an LLC?
You can also try "difference between s corp and llc" or such in your
> >For someone who wants to create an entity for their handyman/home-repairs
> >business, what are some of the pros and cons of setting it up as an S-corp
> >vs. an LLC?
favorite search engine. That's just to get started. The information
from a pro will be better.
> >In general, my thinking is that a single-member LLC would be less
> >complicated than and S-corp to operate and maintain.
>
> Not necessarily. The general rule is that you need to keep GOOD RECORDS.
> Good records are good records regardless of whether you're a Schedule C, C
> Corp, S Corp, LLC, or a Trust.
for your Schedule C business or single member LLC.
Two nice things about single member LLC are that: You don't have to
file 1120-S which is due by 3/15 and will cost more than just adding a
Schedule C to your normal individual tax return; you get a deduction
for one half of self-employment tax which makes your federal and state
tax less.
> D) Corporations are subject to more strict state compliance rules than
> LLCs - GENERALLY. For example, Maryland says ALL corporations MUST hold an
> annual meeting of the directors/stockholders - even if it is just YOU. BUT
> LLCs don't have to have that meeting. NOTE - that does not mean that having
> the meeting is bad idea. I recommend all my business clients have an annual
> meeting to record decisions. This stuff comes in handy during an audit by
> the taxing authorities.
corporations don't have to pay the $800 minimum tax in the first year,
but LLC's have to. In the second year, both LLC and S corps have to
pay the $800 minimum tax -- even if the corporation/LLC has a loss!
In addition, in CA distributions from the corporation are subject to
an additional 1.5% of tax, which matters if the corporation makes a
lot of money -- say you take a distribute of $10,000 -- so 1.5% is
just $150 and you have to pay an additional $650 to meet the $800
minimum so it doesn't matter because you have to pay at least $800,
but if you take a distribution of $100,000 -- then 1.5% is $1500 so
you pay $700 in addition to the $800 minimum tax. And if you're an
LLC you have to pay a fee based on the profits you make. These
additional tax considerations are in CA only.
Phil Marti
Feb 18, 2012, 6:23:04 AM2/18/12
to
On Feb 16, 1:26 pm, "NPOguy" wrote:
> For someone who wants to create an entity for their handyman/home-repairs
> business, what are some of the pros and cons of setting it up as an S-corp
> vs. an LLC?
May I suggest that you first weigh the need for a separate legal
> For someone who wants to create an entity for their handyman/home-repairs
> business, what are some of the pros and cons of setting it up as an S-corp
> vs. an LLC?
entity? There is no difference in the Federal tax world
between a single-member LLC and an unincorporated sole proprietor. (A
sole prop can get an EIN if you're worried about
giving your SSN to customers.) My first inquiry would be to a lawyer
who's not in the business of churning out LLC's. There
are ways other than incorporation to deal with liability issues.
Insurance, for one.
Phil Marti
VITA/TCE Volunteer
Clarksburg, MD
Gene E. Utterback, EA, ABA
Feb 18, 2012, 12:56:48 PM2/18/12
to
"Phil Marti" wrote in message
news:cc465dba-2cae-4b2d...@hs8g2000vbb.googlegroups.com...
Phil makes an EXCELLENT point. Incorporation, or organization for an LLC,
is no substitute for liability insurance. You may find that its cheaper to
buy a better insurance policy than to pay to form and maintain a formal
entity.
Gene E. Utterback, EA, RFC, ABA
news:cc465dba-2cae-4b2d...@hs8g2000vbb.googlegroups.com...
is no substitute for liability insurance. You may find that its cheaper to
buy a better insurance policy than to pay to form and maintain a formal
entity.
Gene E. Utterback, EA, RFC, ABA
Bill Brown
Feb 18, 2012, 1:15:43 PM2/18/12
to
On Feb 18, 12:56 pm, "Gene E. Utterback, EA, ABA"
advice in this thread.
In particular, Phil's suggestion of insurance is important. THere is
no legal entity that is an adequate substitute for a comprehensive
liability insurance policy.
<G...@AllianceTax.Com> wrote:
> "Phil Marti" wrote in message
>
> news:cc465dba-2cae-4b2d...@hs8g2000vbb.googlegroups.com...
>
> On Feb 16, 1:26 pm, "NPOguy" wrote:
>
> > For someone who wants to create an entity for their handyman/home-repairs
> > business, what are some of the pros and cons of setting it up as an S-corp
> > vs. an LLC?
>
> May I suggest that you first weigh the need for a separate legal
> entity? There is no difference in the Federal tax world
> between a single-member LLC and an unincorporated sole proprietor. (A
> sole prop can get an EIN if you're worried about
> giving your SSN to customers.) My first inquiry would be to a lawyer
> who's not in the business of churning out LLC's. There
> are ways other than incorporation to deal with liability issues.
> Insurance, for one.
>
> Phil Marti
> VITA/TCE Volunteer
> Clarksburg, MD
>
...
> "Phil Marti" wrote in message
>
> news:cc465dba-2cae-4b2d...@hs8g2000vbb.googlegroups.com...
>
> On Feb 16, 1:26 pm, "NPOguy" wrote:
>
> > For someone who wants to create an entity for their handyman/home-repairs
> > business, what are some of the pros and cons of setting it up as an S-corp
> > vs. an LLC?
>
> May I suggest that you first weigh the need for a separate legal
> entity? There is no difference in the Federal tax world
> between a single-member LLC and an unincorporated sole proprietor. (A
> sole prop can get an EIN if you're worried about
> giving your SSN to customers.) My first inquiry would be to a lawyer
> who's not in the business of churning out LLC's. There
> are ways other than incorporation to deal with liability issues.
> Insurance, for one.
>
> Phil Marti
> VITA/TCE Volunteer
> Clarksburg, MD
>
>
> Phil makes an EXCELLENT point. Incorporation, or organization for an LLC,
> is no substitute for liability insurance. You may find that its cheaper to
> buy a better insurance policy than to pay to form and maintain a formal
> entity.
>
> Gene E. Utterback, EA, RFC, ABA
Phil and Gene together have provided much useful information and
> Phil makes an EXCELLENT point. Incorporation, or organization for an LLC,
> is no substitute for liability insurance. You may find that its cheaper to
> buy a better insurance policy than to pay to form and maintain a formal
> entity.
>
> Gene E. Utterback, EA, RFC, ABA
advice in this thread.
In particular, Phil's suggestion of insurance is important. THere is
no legal entity that is an adequate substitute for a comprehensive
liability insurance policy.
Stuart A. Bronstein
Feb 18, 2012, 2:09:16 PM2/18/12
to
Phil Marti <prm2...@verizon.net> wrote:
> "NPOguy" wrote:
>
>> For someone who wants to create an entity for their
>> handyman/home-repairs business, what are some of the pros and
>> cons of setting it up as an S-corp vs. an LLC?
>
> May I suggest that you first weigh the need for a separate legal
> entity? There is no difference in the Federal tax world
> between a single-member LLC and an unincorporated sole
> proprietor. (A sole prop can get an EIN if you're worried about
> giving your SSN to customers.)
Well, a slight difference, because a single member LLC can elect to
> "NPOguy" wrote:
>
>> For someone who wants to create an entity for their
>> handyman/home-repairs business, what are some of the pros and
>> cons of setting it up as an S-corp vs. an LLC?
>
> May I suggest that you first weigh the need for a separate legal
> entity? There is no difference in the Federal tax world
> between a single-member LLC and an unincorporated sole
> proprietor. (A sole prop can get an EIN if you're worried about
> giving your SSN to customers.)
be taxed as a corporation, either C or S. But as you say, they are
normally taxed as sole proprietorships.
> My first inquiry would be to a
> lawyer who's not in the business of churning out LLC's. There
> are ways other than incorporation to deal with liability issues.
> Insurance, for one.
But I normally tell people that if they have to choose, a good
liability insurance policy is more important and more useful.
There also may be local fees or taxes for having an LLC - at least
there are here in California.
___
Stu
http://DownToEarthLawyer.com
Pico Rico
Feb 19, 2012, 1:17:07 AM2/19/12
to
"Stuart A. Bronstein" <spam...@lexregia.com> wrote in message
news:Xns9FFD716F2FB4sp...@130.133.4.11...
> Phil Marti <prm2...@verizon.net> wrote:
>> "NPOguy" wrote:
>>
>>> For someone who wants to create an entity for their
>>> handyman/home-repairs business, what are some of the pros and
>>> cons of setting it up as an S-corp vs. an LLC?
>>
>> May I suggest that you first weigh the need for a separate legal
>> entity? There is no difference in the Federal tax world
>> between a single-member LLC and an unincorporated sole
>> proprietor. (A sole prop can get an EIN if you're worried about
>> giving your SSN to customers.)
>
> Well, a slight difference, because a single member LLC can elect to
> be taxed as a corporation, either C or S. But as you say, they are
> normally taxed as sole proprietorships.
>
>> My first inquiry would be to a
>> lawyer who's not in the business of churning out LLC's. There
>> are ways other than incorporation to deal with liability issues.
>> Insurance, for one.
>
> One difference is that an LLC has limited liability to an extent.
> But I normally tell people that if they have to choose, a good
> liability insurance policy is more important and more useful.
>
> There also may be local fees or taxes for having an LLC - at least
> there are here in California.
"local"? do you mean below the state level?
>> "NPOguy" wrote:
>>
>>> For someone who wants to create an entity for their
>>> handyman/home-repairs business, what are some of the pros and
>>> cons of setting it up as an S-corp vs. an LLC?
>>
>> May I suggest that you first weigh the need for a separate legal
>> entity? There is no difference in the Federal tax world
>> between a single-member LLC and an unincorporated sole
>> proprietor. (A sole prop can get an EIN if you're worried about
>> giving your SSN to customers.)
>
> Well, a slight difference, because a single member LLC can elect to
> be taxed as a corporation, either C or S. But as you say, they are
> normally taxed as sole proprietorships.
>
>> My first inquiry would be to a
>> lawyer who's not in the business of churning out LLC's. There
>> are ways other than incorporation to deal with liability issues.
>> Insurance, for one.
>
> One difference is that an LLC has limited liability to an extent.
> But I normally tell people that if they have to choose, a good
> liability insurance policy is more important and more useful.
>
> There also may be local fees or taxes for having an LLC - at least
> there are here in California.
W
Feb 19, 2012, 1:19:17 AM2/19/12
to
"NPOguy" <NPO...@not-val-id.xyz> wrote in message
news:jhjatf$eq2$1...@speranza.aioe.org...
The main reason for a small contractor to form an S-Corporation is because
any profits in excess of a fair salary save 15.3% on taxes. The employer
(7.65%) and employee (7.65%) contribution to FICA are *not* charged on
profits of the S-Corporation. Those profits are passed through on Schedule
K-1 of the S-Corporation to its shareholders. Those profits will be taxed
as ordinary income, but will not be subject to FICA, which is an additional
tax that only applies on wages up to some maximum capped amount.
It is important to not use this as a tax loophole. You cannot form an
S-Corporation, then pay yourself $5K in salary, and use the above fact as a
way to avoid FICA entirely. The IRS would eat you alive and you would
become an audit target. But you can pay yourself a fair and ordinary salary
as a contractor (which I guess would not be less than about $50K?) and if
you have a very good year, then the surplus profit will come through on the
Schedule K-1 as profit from a business, not subject to FICA.
Some details about this are here (skip the section in middle on qualified
dividends, which don't apply to an S-Corporation):
http://taxes.about.com/od/scorporations/qt/scorp_payroll.htm
There are limits to this benefit, which your accountant can discuss with
you.
One thing I will say is that if you go with an S-Corporation, make sure you
find an accountant who understands S-Corporation "basis" inside and out.
S-Corporations can have very complex basis issues that affect whether
distributions from the S-Corporation are taxable, and the tax rate that
applies.
--
W
news:jhjatf$eq2$1...@speranza.aioe.org...
any profits in excess of a fair salary save 15.3% on taxes. The employer
(7.65%) and employee (7.65%) contribution to FICA are *not* charged on
profits of the S-Corporation. Those profits are passed through on Schedule
K-1 of the S-Corporation to its shareholders. Those profits will be taxed
as ordinary income, but will not be subject to FICA, which is an additional
tax that only applies on wages up to some maximum capped amount.
It is important to not use this as a tax loophole. You cannot form an
S-Corporation, then pay yourself $5K in salary, and use the above fact as a
way to avoid FICA entirely. The IRS would eat you alive and you would
become an audit target. But you can pay yourself a fair and ordinary salary
as a contractor (which I guess would not be less than about $50K?) and if
you have a very good year, then the surplus profit will come through on the
Schedule K-1 as profit from a business, not subject to FICA.
Some details about this are here (skip the section in middle on qualified
dividends, which don't apply to an S-Corporation):
http://taxes.about.com/od/scorporations/qt/scorp_payroll.htm
There are limits to this benefit, which your accountant can discuss with
you.
One thing I will say is that if you go with an S-Corporation, make sure you
find an accountant who understands S-Corporation "basis" inside and out.
S-Corporations can have very complex basis issues that affect whether
distributions from the S-Corporation are taxable, and the tax rate that
applies.
--
W
NPOguy
Feb 19, 2012, 1:21:12 AM2/19/12
to
Bill Brown wrote:
> On Feb 18, 12:56 pm, "Gene E. Utterback, EA, ABA"
> <G...@AllianceTax.Com> wrote:
>> "Phil Marti" wrote in message
>>
>> news:cc465dba-2cae-4b2d...@hs8g2000vbb.googlegroups.com...
>>
>> On Feb 16, 1:26 pm, "NPOguy" wrote:
>>
>>> For someone who wants to create an entity for their
>>> handyman/home-repairs business, what are some of the pros and cons
>>> of setting it up as an S-corp vs. an LLC? ...,
> On Feb 18, 12:56 pm, "Gene E. Utterback, EA, ABA"
> <G...@AllianceTax.Com> wrote:
>> "Phil Marti" wrote in message
>>
>> news:cc465dba-2cae-4b2d...@hs8g2000vbb.googlegroups.com...
>>
>> On Feb 16, 1:26 pm, "NPOguy" wrote:
>>
>>> For someone who wants to create an entity for their
>>> handyman/home-repairs business, what are some of the pros and cons
>> Phil makes an EXCELLENT point. Incorporation, or organization for an
>> LLC, is no substitute for liability insurance. You may find that its
>> cheaper to buy a better insurance policy than to pay to form and
>> maintain a formal entity.
> Phil and Gene together have provided much useful information and
> advice in this thread.
>
> In particular, Phil's suggestion of insurance is important. THere is
> no legal entity that is an adequate substitute for a comprehensive
> liability insurance policy.
Thank you Phil, Gene, and Bill.
> advice in this thread.
>
> In particular, Phil's suggestion of insurance is important. THere is
> no legal entity that is an adequate substitute for a comprehensive
> liability insurance policy.
I agree that insurance is key. In this case, there would be some protection
from liability due to the entity structure and additional protection through
the entity having good insurance.
I think that one of the downsides of only basing protection on insurance
coverage is that the insurance company always has an incentive to try to
deny coverage whenever possible. So, if the insurance company is able to
find a loophole to get out of having to cover the claim, the individual is
then left with exposure to the liability. But, if an insurance company is
able to find a loophole to get out of covering a claim for an entity that is
insured, the fall-back position for the entity may be that the claim can
only go against the assets of the entity and (hopefully) not the individual
entity owner.
NPOguy
Feb 19, 2012, 1:20:11 AM2/19/12
to
Gene E. Utterback, EA, ABA wrote:
>> "NPOguy" wrote in message news:jhjatf$eq2$1...@speranza.aioe.org...
>
>> For someone who wants to create an entity for their
>> handyman/home-repairs business, what are some of the pros and cons
>> of setting it up as an S-corp vs. an LLC?
>> .....,
>> "NPOguy" wrote in message news:jhjatf$eq2$1...@speranza.aioe.org...
>
>> For someone who wants to create an entity for their
>> handyman/home-repairs business, what are some of the pros and cons
>> of setting it up as an S-corp vs. an LLC?
>> In general, my thinking is that a single-member LLC would be less
>> complicated than and S-corp to operate and maintain.
> Not necessarily. The general rule is that you need to keep GOOD
> RECORDS. Good records are good records regardless of whether you're a
> Schedule C, C Corp, S Corp, LLC, or a Trust.
By that, I meant what you wrote below about corporations having to be more a
>> complicated than and S-corp to operate and maintain.
> Not necessarily. The general rule is that you need to keep GOOD
> RECORDS. Good records are good records regardless of whether you're a
> Schedule C, C Corp, S Corp, LLC, or a Trust.
little careful about having annual meetings, etc.
>> On the other hand, if it is set it up as an S-corp, I think that
>> customers wouldn't have to worry about or deal with having to issue
>> 1099's to the company because 1099's are not required for payments
>> to corporations.
> Not necessarily - 1099s are required to be issued when someone is paid
> during the normal course of BUSINESS. So if you come to my HOME to
> fix my washing machine it matters not a lick what I pay you, it was
> NOT part of MY BUSINESS so no 1099 would be required. On the other
> hand, if you came to MY OFFICE to fix my furnace I'd have to issue a
> 1099 to you if were anything OTHER than a corporation.
message is that the "handyman/home-repairs" business would be doing a lot of
work for real estate investors who own rental properties or are doing a
buy-rehab-sell type of real estate business. So, those "customers" of the
handyman/home-repair business would be businesses themselves. Nevertheless,
I appreciate the point you made about ordinary home owner customers not
needing to do 1099's, which is something that I had not thought about.
>> I am not sure, but I think that if someone sets an entity up as a
>> corporation, and then elects to make it an S-corp, they don't have
>> to deal with the issue of "double taxation" since the S-corp would
>> be a pass-through entity as far as income taxes are concerned.
> profit. BUT the IRS is taking exception in certain circumstances -
> some of which I agree with and some of which I don't. For example,
> if you were a professional S Corp (doctor, lawyer, accountant,
> engineer, IT, Consultant, Artist) and company income is the result of
> the efforts of THREE OR FEWER owners/employees, the IRS is trying
> (operative work is TRYING - the tried and failed to pass this last
> year and I fear it will come back to haunt us) to subject profit
> distributions to Self Employment taxes. Likewise, some tax pros
> argue that if there is ONLY one employee that all the profit MUST be
> the result of that person's efforts, hence they think that all money
> taken should be treated as payroll.
That is an interesting point. I remember a friend of mine having a S-corp
> some of which I agree with and some of which I don't. For example,
> if you were a professional S Corp (doctor, lawyer, accountant,
> engineer, IT, Consultant, Artist) and company income is the result of
> the efforts of THREE OR FEWER owners/employees, the IRS is trying
> (operative work is TRYING - the tried and failed to pass this last
> year and I fear it will come back to haunt us) to subject profit
> distributions to Self Employment taxes. Likewise, some tax pros
> argue that if there is ONLY one employee that all the profit MUST be
> the result of that person's efforts, hence they think that all money
> taken should be treated as payroll.
set up by an attorney a few years ago for her small business, and her CPA
worked out with her and the attorney that she would own 90% of the shares
and each of her two children would own 5% of the shares. Now that you point
that out, I think that was probably part of the reason for doing it that
way.
> Whatever you do, form the company in the same state you're going to
> MOST or ALL of your work in.
> Many people think if they form in "Tax
> Free Nevada" that they don't have to pay tax - NOT TRUE.
waste of time and money.
> A few other things to consider -
>
> A) if its only you and no one else, no employees - either a single
> member LLC or a Schedule C means you will NOT have to run payroll for
> yourself. If you set up either a C or S Corp you'll need to run
> payroll;
> B) LLC members and Schedule C sole proprietors are NOT allowed to take
>
> C) a single member LLC is a disregarded entity. As such it files a
> Schedule C. Schedule C owners pay Self Employment tax on the NET
> INCOME from the business EVEN if there is no income tax because of
> itemized deductions. So you have no ability to even consider
> distributing some of the money as profit NOT subject to payroll or SE
> tax;
> D) Corporations are subject to more strict state compliance rules than
> LLCs - GENERALLY. ...,
> C) a single member LLC is a disregarded entity. As such it files a
> Schedule C. Schedule C owners pay Self Employment tax on the NET
> INCOME from the business EVEN if there is no income tax because of
> itemized deductions. So you have no ability to even consider
> distributing some of the money as profit NOT subject to payroll or SE
> tax;
> D) Corporations are subject to more strict state compliance rules than
All good points.
> There a host of other items - I actually have a 33 Item list of the
> different attributes and how they play out for different entities.
helpful.
NPOguy
Feb 19, 2012, 1:22:07 AM2/19/12
to
removep...@yahoo.com wrote:
> On Feb 16, 1:40 pm, "Gene E. Utterback, EA, ABA"
> <G...@AllianceTax.Com> wrote:
>
>>> For someone who wants to create an entity for their
>>> handyman/home-repairs business, what are some of the pros and cons
>>> of setting it up as an S-corp vs. an LLC?...,
> On Feb 16, 1:40 pm, "Gene E. Utterback, EA, ABA"
> <G...@AllianceTax.Com> wrote:
>
>>> For someone who wants to create an entity for their
>>> handyman/home-repairs business, what are some of the pros and cons
> ..., Two nice things about single member LLC are that: You don't have to
> file 1120-S which is due by 3/15 and will cost more than just adding a
> Schedule C to your normal individual tax return; you get a deduction
> for one half of self-employment tax which makes your federal and state
> tax less.
Okay. Got it. Thanks.
> Schedule C to your normal individual tax return; you get a deduction
> for one half of self-employment tax which makes your federal and state
> tax less.
>> D) Corporations are subject to more strict state compliance rules
>> than LLCs - GENERALLY. For example, Maryland says ALL corporations
>> MUST hold an annual meeting of the directors/stockholders - even if
>> it is just YOU. BUT LLCs don't have to have that meeting. NOTE -
>> that does not mean that having the meeting is bad idea. I recommend
>> all my business clients have an annual meeting to record decisions.
>> This stuff comes in handy during an audit by the taxing authorities.
> I think CA passed such a law recently as well. Also in CA,
> corporations don't have to pay the $800 minimum tax in the first year,
> but LLC's have to. In the second year, both LLC and S corps have to
> pay the $800 minimum tax -- even if the corporation/LLC has a loss!
> In addition, in CA distributions from the corporation are subject to
> an additional 1.5% of tax, which matters if the corporation makes a
> lot of money -- say you take a distribute of $10,000 -- so 1.5% is
> just $150 and you have to pay an additional $650 to meet the $800
> minimum so it doesn't matter because you have to pay at least $800,
> but if you take a distribution of $100,000 -- then 1.5% is $1500 so
> you pay $700 in addition to the $800 minimum tax. And if you're an
> LLC you have to pay a fee based on the profits you make. These
> additional tax considerations are in CA only.
to what CA does. For example, in NJ, single-member LLC's do not have to pay
any minimum state income tax, but any corporation (even if it does no
business and has zero income and expenses; or if it does business has zero
profits or even a loss) must pay a minimum state income tax of $500/year.
And, in NJ, there is no state income tax on shares of a corporation or
assets of an LLC.
NPOguy
Feb 19, 2012, 1:15:05 PM2/19/12
to
W wrote:
> "NPOguy" <NPO...@not-val-id.xyz> wrote in message
> news:jhjatf$eq2$1...@speranza.aioe.org...
>> For someone who wants to create an entity for their
>> handyman/home-repairs business, what are some of the pros and cons
>> of setting it up as an S-corp vs. an LLC?...,
> "NPOguy" <NPO...@not-val-id.xyz> wrote in message
> news:jhjatf$eq2$1...@speranza.aioe.org...
>> For someone who wants to create an entity for their
>> handyman/home-repairs business, what are some of the pros and cons
> The main reason for a small contractor to form an S-Corporation is
> because any profits in excess of a fair salary save 15.3% on taxes.
> The employer (7.65%) and employee (7.65%) contribution to FICA are
> *not* charged on profits of the S-Corporation. Those profits are
> passed through on Schedule K-1 of the S-Corporation to its
>
> Some details about this are here (skip the section in middle on
> qualified dividends, which don't apply to an S-Corporation):
>
> http://taxes.about.com/od/scorporations/qt/scorp_payroll.htm
Thanks for the information. I also checked out the link and is helpful.
> Some details about this are here (skip the section in middle on
> qualified dividends, which don't apply to an S-Corporation):
>
> http://taxes.about.com/od/scorporations/qt/scorp_payroll.htm
Rich Carreiro
Feb 19, 2012, 8:23:18 PM2/19/12
to
"NPOguy" <NPO...@not-val-id.xyz> writes:
> I agree that insurance is key. In this case, there would be some protection
> from liability due to the entity structure and additional protection through
> the entity having good insurance.
If it's a one-man business there won't be very much protection from
> I agree that insurance is key. In this case, there would be some protection
> from liability due to the entity structure and additional protection through
> the entity having good insurance.
liability due to the entity structure. You're always personally
responsible for your own tortious actions. There's no business
structure you can set up to avoid that liability.
Where liability protection would come in is to the extent other
parties are willing to accept obligations of the entity without
demanding a personal guarantee from you. So for example, if your bank
is willing to give a loan to your one-man S-corp or LLC, then yes, you
wouldn't personally be on the hook if the business defaulted on the
loan (assuming you obeyed all the formalities so the veil can't be
pierced).
--
Rich Carreiro rlc-...@rlcarr.com
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