The Difference Between an LLC and S Corp | Mark J Kohler

hey mark Kohler here CPA an attorney helping clients around the country structure their businesses now I'm so glad you're watching this because you obviously must be interested in the difference between the LLC and the S Corp now there's a lot of videos out there don't be tricked by the length of someone's video or maybe they've got a little sexier approach to something I want to give you the cold hard facts on the differences and what time is the right time to set up the LLC versus the S corp okayed a big picture right off the bat there's actually three ways I use an LLC and for those of you that have seen maybe my presentations before you like mark I know where you're going with this I'm not gonna watch the whole thing right tight I want to try and wow you because these are these are more technical reasons or ways you might use an LLC and there's three of them but big picture I'm gonna work on this left side right side kind of the standard use of an LLC or an S corp and then go from there all right left side right side here we go now on this side I have operations and then on the right side I have holdings and I've got this kind of dividing line or veil for asset protection in a dividing line for tax planning this would be ordinary income this is ordinary meaning you're doing something that is transactional you're selling a product or service this is more passive income you're holding something long-term and their assets doing the work for you now in a real estate context in this videos not all about real estate think of chip and Joanna down in Waco Texas on fixer-upper they're flipping homes that's happening in less than 12 months so it's short term in nature and in that situation we're worried about self-employment tax big problem here when it comes to this side of the equation there's a story in a moral to the story here in just a moment passive income is something you hold more than 12 months and again the assets doing the work for you this could be interest points dividends capital gain appreciation rent long-term holding type assets greater than 12 months and there's no self-employment that's good the assets doing the working for you not you all right now that brings us to the primary reason for an S corporation not a C Corp watch my other videos on C corpse I'm not a fan especially for the small business owner and I'll go toe-to-toe with anyone that wants to talk otherwise so we can figure that out later but just to trust me on this the S corporation is wonderful for this now it could be an LLC taxed as an S corp I'll come back to that but this is an S corporation for tax purposes money comes in expenses go out profit no self-employment tax what no corporate tax and I'm saving money no Obamacare and I'm getting the new 20% pass-through deduction this is beautiful I get asset protection I'm saving on self-employment tax now the catch is I've got to take a salary but that and that w-2 is part of this equation I've got other videos out there on S corporations it's really cool put in the word matrix the Kolar matrix it's not a movie it's all about choosing the right salary good stuff articles diagrams all the good the good things on saving on self-employment tax that's where we use an S corporation there's no assets here this is a business now maybe there's a forklift or some computers or some desks and all that but I'm not putting rental properties here or I'm not putting big-time assets here this is for operations to save on self-employment tax boom now that brings me to the first reason to use an LLC the first place an LLC makes sense is for holding assets and we're all used to that and all see holds rental property boom bada bang it could hold investment accounts or some a farm a ranch some sort of asset you're trying to protect or something that has an asset that's cream passive income that you want to protect yourself from so here you're trying to protect yourself from the tenant but Ching and you're also trying to protect the rental property from you texting and driving but Ching so we got this armored here states are gonna have different rules you've got to study up on copes my book ohmygosh which book do I start with it financial freedom tax and legal playbook I've got some excellent reading material in my book go over to Amazon for that on this asset protection and where we go with this or this is a whole other world but it starts with this and I'm gonna put this in red the first reason you might use an LLC is for holding assets for asset protection does an LLC save taxes no now I want to repeat this for everybody out there because I don't care what you hear on other websites I'll stand behind this till the day I die unless the law changes LLC's do not save taxes period people go I gotta set up my LLC for my business what you need protection cool but it's not saving you taxes well you go will mark my all-season S corp it's saving new taxes there's no no no I'll see anymore you made an S election that my friends is the second reason we use LLC's is I might create an LLC then tax it as an S corp that's the second reason how an LLC can be used now why I like this is because it gives us some planning opportunities number one easy squeazy we're gonna maybe have one LLC for each rental maybe one LLC for 20 rentals all sorts of issues to consider there and there's no perfect fit for though every person out there so be careful clicking on a website you know the one I'm talking about and just setting up an entity get a consultation with a lawyer hopefully with some tax experience or on my team would be a good fit or shop around that can explain this and if they look like deer in headlights and you can explain this faster than your attorney you got the wrong attorney now last bit here I want to just quickly wrap this up with the second and third reason and why said this transition strategy from an LLC to an S corp is a planning opportunity is because say you're starting out for the year this would be example one I'm starting out for the year and I don't know if I'm gonna make enough money to make the S corp make sense or pay for itself I love it when it does in fact I'm gonna repeat this right now every dentist doctor engineer attorney accountant plumber electrician contractor we're all S corporations Realtors brokers orthopedic surgeons were all S corporations unless you're an employee for someone but if you own your own business that's where we run the S corp but when you start your business you may be like I don't know if I'm gonna make enough money to do this salary thing and yada yada so we start out as an LLC and then we go throughout the year and we go oh like I'm making a lot of money I can backdate my LLC into an S corp and there's a special Revenue Ruling that allows you to do it even near the end of the year don't worry about the 90-day rule your accountant should know what to do so this LLC can be turned into an S corp and that's that number two reason that I really like is I can start out with this LLC and then transition it another example would be some of you watching right now you might be at the end of the year going oh my gosh I'm gonna pay way too much in self-employment tax the LLC's not gonna save me can I back date my LLC to the first of this year and start payroll now yes and we do it all the time it's legal it's legit and if your accountant out there is telling you you got to take a bigger salary it's an audit risk you may have the wrong accountant I for 20 years we have done thousands of escort tax returns thousands of payrolls for clients with S corporations including my own for 20 years and I put out my payroll matrix where we find a reasonable payroll level that's subjective I'll give it to you as subjective but you should generally have more profit than payroll and I'm gonna push the envelope until I'm okay with the IRS please study up on my other videos and writings and blog articles and get a consultation if your accountant is telling you that you can't save with the Ness Corp get a second opinion I don't care if it's your brother-in-law or sister-in-law and you make him a spaghetti dinner when they knock it out on turbo tax wrong you're losing money sorry I got off on a rant there now the second that is so the third sorry I was gonna say that second example is I can go back and backdate an LLC when you discover that the S corp needs to be there for you and to make sense so anyway that's that other example now I want to show number three of when this can make sense so number three is let's say you're in a partnership scenario and this was really straightforward I've got an S corp say my camera guy right there has an S corp and we're gonna go import-export trinkets from some country in the Far East or somewhere well that's ordinary income buy and sell a product we may be doing a service we may be who knows what flipping a home so if we're gonna create ordinary income what energy do we need that's right an S corporation well I already have an S Corp I don't want another S corp so my camera guy and me take our 2 s corpse and we've set up an LLC for our partnership guys I'm an attorney with a great team of paralegals and accountants I only have one S corp in my life that's it only one S corp it owns part of a firm over here part of a project here it owns a URL here a DBA here or whatever I have one S corp in my life where I do a significant tax planning and then I own parts of other LLC's with other partners that my friends is the third way you can use an LLC and you want it you want asset protection from your partners through the diffusion but it's not saving taxes it's a separate bank account a separate merchant account a separate tax return but together we create this LLC and our 2's corpse on it alright anyway probably the video is longer than I want it to be but this this is the basics these are really the issues you want to consider when you're trying to decide between an S corp analogy and please I beg if you be careful going out online and trying to just click a mouse we literally have two paralegals all they do is fix people's entities that they set up online hoping to get it right and we try to be affordable find someone that's affordable that understands the tax and legal issues that can help guide you through this selector and then you're good then you can maintain it maybe do a little checkup once a year I wish I could do plumbing I go to Home Depot in the weekends playing around and all the different aisles having a good time and then I come back to the house and Jack something up then I call a professional on Monday and they chew me out for trying to do DIY don't try to play lawyer on TV don't make the same mistake I do with plumbing get a professional not even I don't care if it's me or not but get out there just have a consult with someone or have someone separator we said it anybody's in all 50 states for 800 bucks that's it and you get an hour with a real attorney on the phone not apparently go telling you what the attorney said or going through some script so shop around get some advice make the right decision between these two entities and it will help you be more successful and make more money with your American Dream Thanks thanks so much for watching that video and I want to be your source for tax and legal strategies it's hard enough to live the American dream without being out on the web on Google trying to find answers to complex questions and just click in a mouse hoping you got it right my team and I want to be a huge resource treatment the law firm accounting firm by education resources on my site please continue to follow these strategies I know the safety thousands now click here if you want to be a part of my newsletter it's awesome weekly updates and deadlines and strategies and tips also subscribe to my youtube channel you'll love it and make sure to click the bell icon so you get a little ping whenever there's a new video and finally check out my site Marcin Kohler comm with all sorts of videos probably 70 plus videos 30 plus hours of content that'll save you thousands

Channel: Mark J Kohler

Views: 80,362

Keywords: tax, irs, finance, taxes, income tax, llc, limited liability company, s corp, s-corp, s corporation, se taxes, self employment tax, se tax, small business, entrepreneur, asset protection, real estate

Id: Y9Act--MkIc

Length: 12min 6sec (726 seconds)

Published: Tue Oct 29 2019