Why You Should NOT Form an LLC!

welcome back to tactics made simple i'm your host carlton dennis and in today's video we're going to discuss whether or not the llc is dead in the united states there are more small based business owners than ever before they're actually 30.2 million small based business owners according to the small business association but why does it feel like there are less llc owners one thing to know is that my company files tax returns for small based business owners and we have experienced 30 percent less llc owners over this past year does that mean i'm taking on less business or does that mean there's less business owners or maybe it means that the llc is dead and in this video i'm going to explain to you what the difference is between an llc and another type of entity structure and whether or not you need to switch for tax savings let's dive in all right guys welcome back into taxes made simple where we go over the truth the hard facts around taxes and we simplify it for you here now i'm gonna simplify why the llc might be dead for you as a business owner and why you might need to make a consideration before the end of this year one thing is for certain though if you do not stick to the end of this video you will have a lapse in your understanding between the other entity structures such as a c corp and an s corporation so i encourage you to stick around now one thing i want you to know about the llc is that it's the perfect entity structure for new business owners let's talk about why an llc might be a great entity structure for someone who's a new business owner when you're getting started in business you're gonna have a lot of cost associated with getting started you will market your services you will market your products you will spend money on advertising you'll spend money hiring people and you'll carry programs and softwares and different materials to get the job done but one thing that will come up is how you wish to pay yourself and sometimes just pulling money out of your bank account may not feel right to you as a business owner so a lot of business owners will take it upon themselves to go open up a business bank account but before they do that they will do some research online and when you typically go online you learn about all the llc companies that you can set up your business with there's tons of different companies that you can establish in llc through when you do some research you realize that when you set up an llc it does come with an ein number so you can go open up your bank account and maybe you even do some more research to find out that hey if i have an llc i even might be able to use my business credit to buy for things instead of using my personal credit card to buy for things so this is when the business owner who's new starts to make the transition over into the limited liability company now when you've gotten yourself into the llc you've done a really great job of separating the liability from yourself and from your business you're no longer viewed as just one person you're viewed as a business and you're viewed as a person over here an individual your entity however is still a flow through entity which means all your income and expenses will flow through to your personal tax returns but you did a good job of separating the liability from yourself something happens in your business it's in your business something happens to you that's over here where you're doing things so we want to make sure that we understand why business owners set up llcs they typically want to separate personal from business and they want to make sure that they have the liability protection now if you're a new business owner you're probably not making a whole lot of money let's be honest most new business owners in their first year don't profit i deal with a lot of business owners that end up being at a loss because they had more expenses than they did income is that a problem no it's not we just want to make sure that you're working towards an economic gain now if you're an llc owner one thing is for certain you need to make sure that you're getting to a place of profitability and when you get to a place of profitability it's time that you start to pull some money out of your business maybe it's time for you to pay yourself back setting up an accountable plan is how you can do this inside of the quickbooks or any type of accounting software that you choose to set up but when you get to a place where you're ready to pay yourself back you need to know what that looks like and business owners i want you to know this is why the llc is now dead there has been a change over this past year in 2020 where now taxpayers have more access to information and information coupled with action leads to a different outcome on your tax returns i have experienced more business owners transitioning from the llc to an s corp than i have ever experienced in my seven years of doing tax strategy and accounting and the irs estimates that there are over 5 million s corporations as of this year 2021. three times the number of c corporations small businesses are the cornerstone of the american economy and s-corps are the cornerstone of american small business community so when you are becoming successful as an llc owner you need to know why your llc will become dead to you when llc owners are becoming more successful they're making more income and as you make more income it makes sense to pay yourself more it makes sense for you to budget even how much you might pay yourself and how much you might leave in your business to continue to grow your business as a business owner you shouldn't be doing this alone and more so you shouldn't be doing this inside of an llc this is when knowing when to switch to an s corporation becomes very valuable to you so you can save money on taxes and earn more money by being smart and savvy we're going to jump into the ipad right now where i'm going to teach you the difference between the llc the s corporate and corporation around five characteristics they'll make it very simple for you to understand when you need to transition let's dive in all right guys we're going to jump into the ipad this will be the most thorough explanation you will ever receive on the difference between an llc and s corporation because i'm going to give you the exact math that a tax accountant can't give you over a phone call this math you will be able to refer back to you'll be able to run the numbers and you'll be able to calculate your own tax to determine when it makes sense to switch out of the llc to the s corporation let's jump in so the first thing we're going to do is we're going to decipher the difference between the llc the s corp and the c corporation based off a hundred grand gross income so if i have a hundred k gross in an llc 100k gross in an s corp 100k gross in a c corp we need to talk about some characteristics between these different entity structures an llc like the s corporation is a flow through entity all the income flows over to the shareholder which is you and i or the member if you're in an llc which is you and i flow through entities such as llc's and sole proprietorships pay a self-employment tax of 15.3 percent so an llc owner is going to pay that on all of the businesses net income net income means after all expenses after you spent your money on everything inside the business now the s corporation owner does not pay self-employment tax we're going to talk about what the s corporation owner pays and the c corporation owner does not pay self-employment tax the c-corporation owner does not pay self-employment tax just like the escort owner now the true difference comes in when you as a business owner decide you want to pay yourself llc owners who decide they want to pay themselves aren't really processing payroll they're taking distributions payroll is for the owners of s corps and c corporations or llcs that have been taxed as c or s corporations so if you're an llc owner you do not run payroll for yourself which means that the money you pulled out of your bank account to live to pay your mortgage to pay your rent to pay your car bill those items that you're spending money on yes the items may be tax deductible such as your car bill your car payment but if you pull money out of your business to go live you don't get a deduction based on the money you gave yourself okay let's say you switch over into an s corporation this is when payroll for you becomes tax deductible so it's a requirement being in an s corporation also if you decide to become a c corp you can choose to take dividends or a salary out of your c corporation so you will pay payroll taxes and process a payroll tax return now the real kicker here is that when you're in s corp yes you're paying social security and medicare tax self-employment tax like a llc owner pays into but it's really considered payroll tax because you're only paying that amount on what you paid yourself and you receive a deduction when you pay yourself as a business owner llc owners do not receive a payroll deduction for paying themselves they only receive a payroll deduction when they pay employees but if you're an s-corp owner you do receive a deduction when you pay yourself and if you're a c-corp owner you do receive a deduction when you pay yourself out of your c-corp now llc owners don't pay payroll tax because they don't have payroll they pay self-employment tax they're their own employers and their own employees but they pay 15.3 on all net income s corporation owners just pay 15.3 based on the money they paid themselves so there's a difference there yes we pay payroll taxes as corporation owners but the amounts is far less and we're going to go over an example if you're a c corporation owner you can choose to take payroll out of your c corp which is taxable income to the owner this leads into double taxation the c corporation is the only entity structure that's a non-flow through entity which means that the c corp needs to file its own tax returns and needs to pay its own taxes unlike the s corp and the llc the s-corp and the llc file their own taxes but the s-corp and the llc don't pay any taxes you the shareholder or the member of your llc you will pay taxes one time whereas the c-corporation owner pays taxes based on 21 federal tax rate for the c corp based on whatever's inside of that c corp as net income and then whatever you choose to pay yourself in a salary outside of the c corp you'll pay federal state taxes and then also payroll taxes on the amount you paid yourself so that leads c corporations to having double taxation an s corporation does not have double taxation neither does a llc or a sole proprietorship these are our flow through entities that are not subject to se tax now you might be wondering well when does it make sense carlton for me to switch over from an llc or sole proprietorship into an s corporation there is a threshold to switch and what we're gonna do is we're gonna go for an example i want to go over an example of a single taxpayer who happens to run a candle business i always refer can refer to candles because my mother used to buy yankee candles when i was younger and they were like always like lavender eucalyptus and when i started teaching tax strategy i always used candle businesses as an example so we're going to be a candle business owner today and let's say we're single which means that we're not filing married right single and we're 1099 income earners we're self-employed you see right here i've already written up some numbers for you if i make a hundred thousand dollars net business income i now can call that my agi and i'm gonna start factoring in my deductions what are the deductions that i receive as a single taxpayer well if i don't own a home and i'm not paying property taxes or mortgage interest i'm probably taking the standard deduction the standard deduction in 2021 is 12 550 so that's the first deduction i get to slice off of my tax rate one hundred thousand dollars minus twelve thousand five hundred and fifty okay that's your standard deduction amount that you get to reduce but once you have your next number you get to factor in the qvi the qbi deduction is 20 so we're going to take 20 on top of the standard deduction which is an additional deduction of 17 490 guys keep with me on this we took the standard deduction which is already given to you as a single filer then the next deduction we took is called the qbi deduction qbi stands for qualified business income deduction it's 20 on net income you did not pay yourself so if i am a business owner and i have net income i'm going to take 20 percent this example gives me a qbi deduction of 17 490. now my new taxable income is reflected it's at 69 960 now i pay self-employment tax now i pay 15.3 percent and when i pay 15.3 percent i did the math for us fifteen point three percent is ten thousand seven hundred and four dollars that's a lot of self-employment tax that i'm gonna have to pay yes one half of self-employment tax is deductible which is 5 352 but i still have to pay 10 704 in self-employment tax it's still going to come out of my pocket okay so let me factor in my deduction i get half of the self-employment tax that i paid into as a write-off which puts me down to new taxable income of sixty four thousand six hundred and eight dollars okay now that my taxable income is sixty four thousand six hundred eight dollars i need to compare that with the federal tax brackets for a single filer to really figure out how much i'm going to owe in taxes so when i jump down and i factor in the single federal tax rates i can see the amount of money that i have being taxed at the 10 percent bracket the amount of money that's being taxed at the 12 bracket and the amount of money that's being taxed into 22 bracket when i factor in the 10 percent it gives me 995 dollars when i factor in the 12 bracket it gives me 3669. and last but not least when i factor in the 22 bracket i'm left with 5 298 so if i add up all of these federal taxes of the tax brackets i fell into it because i fell into the 10 12 and 22 percent my total federal tax is 9 962 and 4 cents my self-employment tax which i already had to pay is 10 704 but if i'm in california let's factor in some state taxes to see how really real it is i'm paying an additional two thousand and eighty dollars and thirty two cents for a total tax of twenty four thousand eight hundred and twenty six dollars and thirty two cents lord someone come and help me i need to be resuscitated after paying that amount i need someone to come in and revive me because i'm no longer a six figure earner okay i barely have seventy six thousand dollars to my name now okay so this is important for us to learn this is what it looks like if we're in an llc this is how much tax we're paying how much goes to the fed how much goes to the state how much goes to self-employment tax how much doesn't come back into carlton's pocket okay now let's say we jump down and we go over an s-corporation what's the difference in the amount of tax we pay being in an s corporation versus being in an llc doesn't mean our llc is dead to us now should we just abandon it and switch to an escort let's talk about it so same example same example hundred thousand dollars net income one thing you want to know about an s corp that i already mentioned before is that the s corporation has to run payroll so if i'm an s corporation owner i got to process the w2 to myself and the government wants to make sure that the w2i process to myself is a reasonable amount okay in our office we have done a lot of audits with payroll department the edd and we've come to know that the edd is looking for business owners to take a minimum of 30 of their net income okay so we don't mess with that anymore so let's just say i'm over that threshold i take 35 of my net income that gives me 35 000 in a w2h okay so i have 35 000 that i paid myself as a w-2 employee and then i got this other 65 000 sitting in the business let's first figure out how much in taxes i'm gonna pay on the 35 000 i paid myself so we have to run payroll which means i need to get with a payroll company like carla dennison associates uh adp somebody somebody's got to process a payroll for me let's say when i process payroll for myself i decide to have the payroll taxes withheld so i don't have to pay it later that makes sense i'm gonna pay the taxes now so i don't pay it later doesn't that sound like a w-2 employee yes okay so i have payroll taxes being withheld payroll tax is 7.65 for me being the employee and 7.65 on me being the employer so on 35 000 i'm paying about 15.3 percent the same amount of self-employment tax that my llc owners had to pay except i'm only paying it on the amount i'm choosing to pay myself okay here you guys are learning okay stick with me now stick with me now the payroll tax when we do that comes out to 5 355 i did the math already the federal taxes associated with you earning 35 000 is what we have to calculate next so i put the brackets here when you only earn thirty five thousand dollars that you paid yourself you only put yourself into the ten percent bracket and the twelve percent bracket and the ten percent is nine hundred ninety five dollars and the twelve percent bracket is three thousand and six dollars add those two together you get four thousand and one dollars in federal tax we have federal tax calculated four thousand and one dollars on the amount of money we paid ourselves plus the payroll taxes which was five thousand three hundred and fifty five dollars now we factor in the state of california on that part of the reason why i'm doing california is because california is one of the most expensive states to live in and there's most amount of business owners in california so i know you guys can relate let's say we factor in california state taxes that's an additional 887 okay so i add federal taxes state taxes plus payroll taxes that's payroll so what i get is 10 243 dollars in total payroll taxes that i paid payroll taxes encompass my social security and medicare my federal and state taxes that i paid myself i handled that okay now on the other side of the table i still have 65 000 in business income i didn't pay myself and i haven't even factored in any of my write-offs so let's go there okay so the first write-off i want to factor in is sd what does sd stand for sd stands for standard deduction okay the standard deduction if you're single is twelve thousand five hundred and fifty dollars is twenty five thousand five hundred and ten if you're married now if i'm single i'm taking a standard deduction of twelve thousand five hundred and fifty dollars my new taxable income is fifty two thousand four hundred and fifty dollars okay now the next thing i need to do is i need to factor in the qbi deduction just like how the llc owner got the 20 deduction me being in an s corp i get a 20 deduction on the amounts i didn't pay myself hence qualified business income deduction so 52 grand multiplied by 20 gives me a 10 490 deduction i'm going to factor that in my new net taxable income for my business is now 41 960 this is the number that i need to calculate with federal and state taxes to really determine the difference here so let's do it federally i know that i'm going to fall into the 10 percent bracket which gives me 995 dollars the 12 brackets which gives me 3 669 and the 22 bracket which gives me 315 guys let's add this up if i add it up i get a total federal tax of 4 979 now that's just the federal tax i factor in california as well for you too guys the additional california tax gives you hundred about 1 six dollars in total just on the businesses income we will pay six thousand three hundred and fifteen dollars and thirty four cents in tax and then on the payroll side we'll pay ten thousand two hundred and forty three dollars okay when we add these two numbers together we get our total amount of tax that we pay as a taxpayer so let's factor in the difference as an llc owner we did the math earlier we paid 24 826 in total tax but as an s corporation owner our total tax came out to 16 558 now the net difference between this llc and this s corporation owner is 8 200. in total taxes talking about show me the money [Music] what could you do with an additional hundred 8 sixty eight dollars in taxes well i might wanna put a down payment on a car i might wanna put that towards my investment fund so i can get into another investment property carlton my children have tuition that i need to pay or maybe i wanna put that money into my retirement account so i can continue to grow my finances there's so many things you can do with tax dollars and guess what uncle sam is not there with you when you're working hard when you're spending those extra nights when you're making those extra phone calls or when you're driving he ain't with you i want to make sure carlton's giving you some of that information to have you equipped so you can save money on your taxes legally so this is the true difference between the llc and the s corporation your tax advisor may not tell you to switch to an escort right away they may want to see that you can actually make consistent money and if you're someone who's already making consistent money you should already be in an s corporation this conversation that i'm having with you right now should be like music to your ears you should just feel my words fill into your veins like yes i understand why i'm an escobar john and now you guys have the information to equip you llc's might be dead for you all right so let's do a quick recap we factored in the llc self-employment tax federal state tax california came down to 24 826 then we factored in the escort tax paying payroll tax taking the qbi deduction just like the llc and it came out to sixteen thousand five hundred and fifty eight dollars so the net difference between the llc and the s corp was eight thousand two hundred and sixty eight dollars in taxes but we're still missing the c corporation what happens if we make a hundred thousand dollars as a c corp let's go over this so in this last example here guys i've already done the math for you because calculating c corp tax is actually pretty easy when you have a c corporation the c corp is subject to a 21 federal tax so if we made a hundred thousand dollars net business income inside of our c corporation we can pay ourselves out of our c court we could choose to take dividends or we could choose to take wages now most c corp owners are going to take wages so that way the c court can get a tax deduction and when you take wages just like when you take wages out of a s corp you need to give yourself a reasonable payroll so what we did is we factored in the same amount of payroll amount that we paid ourselves out of an s corporation so i use this same example as the s corp and the total payroll tax comes out to the same amount 10 243. on the other side of the table the business files its own tax returns so we can't factor in the standard deduction yet so if i had 65 000 left over in my business i'm not going to receive a qbi deduction i won't get the 20 like the other flow through entities the llc and the s corp received so 21 sixty five thousand dollars is thirteen thousand six hundred and fifty dollars in federal taxes keep in mind though if you have a california c-corp you're gonna pay california state taxes that's an additional three thousand one hundred and seventy two dollars the total amount of taxes that our c-corp alone pays is 16 822 now us the self-employed person that decided to pay ourselves out of our business we're gonna pay the payroll tax of 10 243 our total tax inside of a c corporation is 27 065 so 27 000 inside of a c corp 16 558 inside of an s corp and 24 826 inside of an llc you now have the breakdown of how much tax you would pay if you had a hundred thousand dollars net income inside of your business but it's up to you as a taxpayer to decide when it's time to switch your entity structure one of the things that i want to make sure you guys are aware of is that there is a threshold to switch from the llc to an s core in our office we have defined this threshold to be right around 45 000 net income part of the reason why we've come to a number around it is because we deal with a lot of clients that need to transition out of the llc to an escort and we run the numbers and on our computer and calculator every single day we're factoring two really important items that many taxpayers don't take into consideration how much is it going to cost you to run payroll and then how much is it going to cost you to file tax returns tax returns for an s corporation are just a little bit more expensive than for an llc and when you're in llc you just don't have to run payroll so you're taking on new expenses the new expenses payroll and you bumping up the amount of money you're paying to actually get your tax returns filed so factoring in some of these new amounts could end up being like an additional couple grand a year and i want to make sure that just because you're dishing out money to become an s corp doesn't mean that you actually end up saving money in your pockets that would be counterintuitive and we're going to dish money out to transition from an llc into an escort which means we're dishing money out to file an escort tax return in to run payroll then on the back end we should be saving some tax dollars 45 000 net income and above is when that threshold the benefits start to outweigh the cost associated with you making the transition so it's absolutely something that is a conversation that needs to be had but from this video you can see how to calculate your own tax and you can always refer back to this video to know when it might make sense for you to transition from an llc to an s corp and eventually from an s corp to a c corporation guys my name is carlton dennis if you like this video please comment on it let me know what you think feel free to subscribe so i can make more videos and if you like hit the like button it helps out the youtube algorithm so i can get more videos on the explore page i look forward to seeing on the next video over and out [Music] you

Channel: Karlton Dennis

Views: 1,082,218

Keywords: limited liability company, llc, how to form an llc, taxes, income tax, how to save money on taxes legally, independent contractor, understanding your deductions, taxes made simple, tax strategy, tax expert, karlton dennis, taxes made simple karlton dennis, deductions in taxes, tax deductions, tax planning, easy tax tips, tax tips, taxes made easy, taxes explained simply, small business, s corp, how to start an llc, what is an llc, Why You Should NOT Form an LLC!

Id: LUpyc89bgBU

Length: 26min 16sec (1576 seconds)

Published: Fri Oct 15 2021