LLC vs S-corp

[thefed]

Ive read a lot, and been confused even more! I am deciding if incorporating my duct cleaning business is nescessary (currently a sole proprietor).

My first thought would be an LLC, as filings are less expensive and less extensive.

However, I see an opporunity for significant tax savings with an S Corp. As I understand it, I could pay myself a 'reasonable' salary based on the number of hours I work (which is normally 15-20 hrs/week). then, the rest of the income can be passed through to me as a distribution. This distribution, to the best of my knowledge, must be reported as income, however it is not subject to the 15.3 % soc security and medicare tax?

I foresee an annual income of approx 50k next year and wonder if it will be advantageous to go with an s-corp. OR, are the filings too labor intensive, which will call for an atty and even more $$


Thanks

 

[uncledrz]

Thefed
This is not legal advice because LLC's and Corps are state law specific and the laws of your State control.

In general, setting up an LLC and Corp should cost about the same. As long as you paid yourself a reasonable salary for you efforts, and draw the remaining income as a distribution reflecting the return on equity/assets, you should be ok. Many do it this way. You are thinking along the right lines.

OTOH, as a soon to be non worker, I need young people such as yourself to feed pay into social security to cover our payouts.

 

[Martha]

The fed is right that all money paid to you from an LLC service business you own and work for will be subject to the 15.3% self employment tax. With an S Corp you may be able to take a reasonable salary and take additional "profit" as a distribution. Fed, I would talk to your tax advisor about what is best for you.

 

[retire@40]

With an S Corp you may be able to take a reasonable salary and take additional "profit" as a distribution.

Where is the additional profit going to come from to justify a distribution? Isn't he the only worker in his cleaning business? Everything he earns will need to be taken as salary. No employees, no subs, no product sales.......no additional profits.

 

[Martha]

Hey, I did say "may" and sent him to his advisor.

I could see it at some point: he markets his business and builds his brand and business reputation. That may have value beyond his labor. He doesn't charge on an hourly basis, but by what the market will bear. And maybe from time to time he has too much work so he contracts some out or hires some guys. But yeah, a stretch. You ever see anyone in a service business with no employees do this?

 

[retire@40]

You ever see anyone in a service business with no employees do this?

Nope, unless there are subs or product sales to justify additional streams of income not tied to the work of the business owner.