LLC vs S Corp: Which one should you choose?

here's a question i get all of the time should i be an s-corp or an llc if you find yourself overwhelmed or confused with choosing between the two then this video is for you i just saved one of my clients over 95 000 in tax expenses for making a simple entity change from an llc to an escort we found out that they have been overpaying in taxes for years and here's the kicker if they would have chose the right entity to start with they'd have hundreds of thousands in tax dollars in their pocket businesses are overpaying in taxes every single year because of the entity they are choosing and it's because most people aren't analyzing the tax consequences associated with the entities they select heck a lot of people just follow the crowd and say i'll register as an llc and have no idea what extra taxes they are going to be paying so today i'm gonna put an end to this and help you choose between an llc or s-corporation for your business hey there i'm crystal with life accounting a full service accounting firm dedicated to helping small businesses get organized with their finances and grow their bottom line today i'm going to break down the similarities and differences between an llc versus an s corp especially the tax differences and what you could expect to pay in taxes with each type i'll also include some easy to follow examples of the taxes you pay by an llc and an escort i'll also outline the compliance requirements and how you can decide which one is best for your business i have personally helped small businesses literally save thousands of dollars by legally avoiding overpaying in taxes by choosing the right entity now to be fair i'm not a lawyer and i'm not giving you any legal advice but i am a licensed cpa and i will break down the gist of the legal jargon and especially focus on the tax items so you can avoid paying too much in taxes if you own a business then ensuring that you're properly structured to save the most in taxes is very important after all taxes are one of if not the biggest expense you'd have besides the tax implications of an llc versus an s-corp there are also legal considerations all of which and more i'm going to explain to you in this video make sure if you're new to our channel to subscribe down below so you don't miss out on future videos and also be sure to tap the like button if you learned anything from this video sound good okay let's dive in so why is entity selection or choosing between an llc and s corp so important the process of choosing the right entity for your business is one of the most important decisions you'll make as an entrepreneur for one the entity you choose plays a huge role in your personal liability in your company if you're ever faced with a lawsuit in addition to the legal aspect taxation is a major reason why choosing the right entity is so important simply put some entities pay more in taxes than others some even pay double taxation meaning you're taxed on the same money twice all in all you want to make sure you set yourself and your business up for success and choosing the right entity is key now if you want to know if you should be an s corp or an llc you first need to have a very clear understanding of what each is first let's start with an llc llc stands for limited liability company this means as an owner of an llc you are not personally liable for the obligations of the business for example if someone sues your company they cannot go after your personal assets if you have an llc in place both an llc and s corp provide you as the business owner limited liability other similarities between the two are pass-through taxation meaning the business itself does not pay income taxes and instead the business profits are passed through to the owners and the applicable taxes are paid at the individual level another similarity is the ability to form partnerships you can have a single member llc or a multi-member llc and the same is true for s-corps both give you the opportunity to have partners now let's get into some specific tax differences between the two llc owners are called members and members are typically paid distributions for tax purposes the irs assumes that all profits made in your llc has been paid to you as a distribution simply put you will pay taxes on all income made in your llc and you'll actually pay two types of taxes on your llc income the first being your regular federal and state income taxes remember the irs assumes that all of your llc profit has been paid to you as a distribution even if it wasn't and you'll owe federal and state income taxes based on that income and any other income you might have earned the us operates on a marginal tax bracketed system meaning the more you make the higher your tax rate the second type of tax you'll pay as an llc owner is self-employment tax this one hits a lot of business owners unexpectedly because they don't know about it the self-employment tax rate currently is 15.3 percent you might recall when you were an employee of a company taxes like fica or medicare being withheld from your pay it was roughly about 7.5 percent of your income your employer also had to pay roughly 7.5 of your income in fica and medicare as well in total it was roughly 15 percent being paid to the government in employment taxes well as a business owner the irs figures well hey you're both the employer and the employee and need to pay us the full 15.3 percent and their self-employment taxes were born there is a limit however to self-employment tax and currently it is a hundred and thirty seven thousand seven hundred dollars so you only have to pay fifteen point three percent of self-employment tax up to this amount any amount higher is taxed at 2.9 percent let's look at an example of an llc taxed as a sole proprietorship let's say you own abc llc and made profits last year of a hundred thousand dollars you would pay fifteen point three percent or fifteen thousand three hundred in self-employment tax in addition to your federal and state income taxes which is based on your taxable income and tax bracket so if you had taxable income totaling seventy thousand dollars you'd pay about eleven thousand dollars in federal taxes this does not include your state taxes in total as an owner of abc llc tax as a sole proprietor you'd pay at least twenty six thousand dollars in taxes annually or at least twenty one hundred dollars per month most business owners see the federal and state income taxes coming i can't say the same is true for self-employment tax so where does s-corp or llc taxed as an s-corp stand in all of this well to avoid the 15.3 percent in self-employment taxes on all of your llc profits many entrepreneurs opt to elect to be treated as an s corporation why as corporations don't pay self-employment taxes on distributions to owners however they do pay self-employment taxes on the salary paid to owners you see as an s-corporation owner you must structure yourself as an employee of the business and pay yourself what's called a reasonable salary and the self-employment tax is only based on your salary not the entire profits or distributions of the business like an llc situation some people might take illegal advantage of this and pay themselves a really low salary so self-employment tax is low and pay out a really high distribution or self-employment tax is not applicable this is why the irs states your salary must be reasonable and align with your actual responsibilities of the business for example if you're an experienced lawyer and most lawyers in your area make ninety five thousand dollars annually it doesn't seem reasonable to only pay yourself thirty thousand dollars in salary other factors determining a reasonable salary are experience level comparable salary geographic location economic conditions and more let's go back to our original example of abc llc but this time taxed as an s corporation if you were to pay yourself fifty thousand dollars in reasonable compensation or salary you'd only have to pay fifteen point three percent or seven thousand six hundred and fifty dollars and self-employment tax on fifty thousand dollars the other fifty thousand dollars would be considered a distribution and not subject to self-employment tax compared to the llc taxed as a sole proprietorship you would save seven thousand six hundred and fifty dollars in self-employment tax or 638 dollars monthly in taxes do you see now why one would choose to be taxed as an s corp in short s corps are able to drastically reduce their self-employment tax obligation by only paying self-employment tax based on their salary and not on their total business income how can you determine if escort status is right for you first you have to determine your intent with the profits of your business if you plan on withdrawing all of your business profits as a distribution and have no plans of reinvesting those funds back into your business s-corp status might be for you second you should consider if you'll make enough profits in your business if after paying yourself a reasonable salary you only have a thousand dollars left to pay yourself as a distribution it's not worth the added effort and paperwork to be treated as an s-corp and speaking of paperwork if after consulting a competent cpa you determine that s corp status is right for you you must file the appropriate irs forms by march 15 if you want your s corp status to be effective in the current tax year if not you'll have to wait until the following year for your s corp to take effect there are some compliance requirements of s-corps which include no more than a hundred shareholders it must be a u.s company the shareholders must be u.s residents and have only one class of stock most small companies easily fall into these categories to recap everything just remember both an llc and s corp provide the same level of limited liability to the business owner and both can be considered llc's llc's taxed as sole proprietorships or general partnerships are taxed on 100 percent of the company's profits and owners of such entities pay both federal and state taxes and self-employment taxes s corpse or llc's taxed as s-corps only pay self-employment tax on their reasonable salary and the rest of the company's profits are treated as a distribution not subject to self-employment tax if you're thinking about being taxed as an s-corp consider what your goals are for the profits you earn in your company whether you plan on reinvesting them or taking it all out as a distribution if you're taking distributions s-corp status might be worth it if you plan on reinvesting your profits another entity type might suit you best also consider if you're making enough profits if not electing to be an s-corp may not be worth it if after these considerations you decide to be an s corp make sure you file the appropriate forms with the irs by march 15th for it to take effect in the current tax year also keep in mind the compliance requirements to keep your s corp status in good standing i hoped you learned some valuable information in this video if you haven't already please go ahead and give this video a thumbs up and comment below what you took away from this video also don't forget to subscribe to our channel to learn more about accounting tax and other financial related topics until next time take care

Channel: LYFE Accounting

Views: 157,990

Keywords: llc vs s corp, s corp, s corp vs llc, llc, llc for tax purposes, s corp tax purposes

Id: AbrweR6hm80

Length: 13min 48sec (828 seconds)

Published: Wed Sep 09 2020