Doesthis make financial sense? "LLC" info needed

[thefed]

I have been reading, reading,discussing, reading,and discussing incorporating my business(es). Main reason is reduce overall liabilty. Secondary is to hopefully reduce tax liability

A discussion with an accountant,as well as a family member who does it, leads me to believe that I can save some $$ overall by becoming an "S" Corp. Taking a 'reasonable' salary will still leave $$ left over to be disbursed, which wont be subject to SS and Medicare...roughly a 15% tax savings.

Just today it hit me....cant an LLC choose to be taxed as an S Corp?If so, what would be the advantages of one over the other? Seems to me the LLC has less involved paperwork and I could still reap the aforementioned benefit of tax savings.

What am I missing? MY appt with said accountant isnt for another week so I'm trying to get my info organized


Thanks

 

[Marquette]

AFAIK, IANAL, I do not believe that an LLC can choose to be taxed as an LLC. All profits flow through to the member(s) and are taxed at the member's nominal rate.

Nolo has an excellent book on LLCs and would be a great read. I'll see if I can track down my copy and get you the title.

wait, nevermind, here is a Nolo article that effectively covers your question:

Should You Form a Corporation or an LLC?

 

[Rich_by_the_Bay]

No law background here, but while an LLC can file as an s-corp, it is not able to do things like creating defined benefit plans and other things that might be very useful.

Also, my understanding is that an LLC (and s- and c-corps) do NOT protect you from damages resulting from you own actions. So unless you want to be protected from actions of other employees or contractors you may not be getting much in that area.

Lots of people around here are much smarter than I am about this, but food for thought.

 

[Ronstar]

I'm a member of an LLC that is essentially a real estate partnership, and also a part owner of a business that is an s-corp. I didn't get actively involved in setting these up - we let the accountants and lawyers handle it. I don't know how one is better tax wise than the other - disbursements from both flow thru to personal returns via K-1's. Maybe the money left in S-corps and LLC's are taxed differently, and maybe one's basis is computed differently. Like Rich said, maybe some business benefit plans are not possible in LLC's. There probably is a lot of complicated differences. I don't know of many businesses that are LLC's even though they seem to be easier to set up. I'm sure your accountant will have some answers for you, but there is a ton of info on the internet to digest.

 

[Marquette]

Ronstar, as I understand it, one of the benefits of a corp is that you can take profits out of the corp as a dividend whereas the LLC will always be K-1 passthru. I believe that's where the 15% savings would come from, taking the profits as a dividend.

Rich, I'm guessing that thefed was referring to stopping his liability at the company rather than flowing through to his personal assets as well... you're right, it won't protect him from himself, but it can at least keep his personal assets out of the fray.

Fed, based on what line of business you're in and all of that, you might want to consider insurance options as well. Also, while I don't think it'll matter in which one you choose, be sure to talk to your accountant about retirement contributions as well.

 

[thefed]

Marquette: Everything I read says an LLC can be treated for tax purposes as an S-Corp. If you dont take this election, the gov automatically assumes the LLC will be a pass-thru entity much like a sole prop. But if you do, one of the major TAX benefits of the s-corp is the avoidance of that 15% ss/medi tax by the way of disbursements(dividends)...thus the LLC should reap the same benefits....no?

Also, my mention of asset protection does refer to my personal assets. If I am sued by a customer and my ins. policies dont cover it all, I dont want an angry customer taking a rental, residence, or any other personal asset.

UNFORTUNATELY every definition of LLC is very ambiguous in this regard...something like "An LLC affords its members some limited liability of personal assets in most cases"

 

[Marquette]

Well, as I understand it, one of the things that may happen in a lawsuit is that the judge may pierce the corporate veil based on a number of factors (more here on Wikipedia: Piercing the corporate veil - Wikipedia, the free encyclopedia). That's probably why you're reading the sweeping statements about protecting liability in most cases.

If I were you, I'd wait and ask your accountant for the definitive answer on tax treatment for payouts as a llc filing as an s-corp. I did run across this older discussion at TaxAlmanac and, while from 2006, it sounded like it was at least a thorny issue then (TaxAlmanac - Discussion:Llc to s-corp)

 

[Martha]

The general consensus is that LLC income from a business in which you are actively involved will be treated like income from self employment and self employment tax will have to be paid on the whole income. (There is an exception for rental income).

Neither an LLC or and S corp. will give you liability protection from your own negligence or bad acts. If the business incurs trade debt which you do not have to guaranty, you should be protected from claims of the trade creditors.