LLC vs S-corp

[spandit]

I recently moved from California, where my wife and I ran an S-corp, to Pennsylvania, where some of our colleagues are telling us to start an LLC. It looks like we could do either here in PA. So, does anyone have any advice about the pros and cons of both?

In Cali, we set up a payroll system and we were the employees. It seems that is not necessary with an LLC. However, I am not exactly sure how to pay ourselves. And, I would assume we make quarterly tax payments if we aren't running a payroll, correct?

Are there any benefits that the LLC will not allow us to deduct as a business expense? Specifically, if we go for the LLC can we still open some type of small business retirement account and pay for healthcare from the business? I think I know the answer to this one: Will I still need an accountant if we set up an LLC?

Any advice is greatly appreciated.

[tfb]

Not an expert but I heard LLC is simpler but S-Corp has the advantage of potential savings on payroll taxes. Try this book from our own ObliviousInvestor (already tagged with support to the forum):

LLC vs. S-Corp vs. C-Corp Explained in 100 Pages or Less

[deathb4disco]

Random thoughts, starting with this:

I am not exactly sure how to pay ourselves.

You have to take "guaranteed payments" which are subject to self-employment tax. Members in an LLC cannot take salaries.

LLC's are very flexible because they're taxed as partnerships. (I'm assuming you're not electing to be taxed as a corporation.) You don't have as much flexibility with an S-corp, but that might not be a concern for you.

However, you can set up an LLC and still elect S-corp status.

Regarding this:

Will I still need an accountant if we set up an LLC?

... I would definitely recommend using a local tax professional. Do not attempt a partnership return on your own. You can thank me later.

[deathb4disco]

... I heard LLC is simpler but S-Corp has the advantage of potential savings on payroll taxes.

Partnership tax is extremely complex, but you're correct on the payroll tax savings with the S-corp.

[tfb]

... I heard LLC is simpler but S-Corp has the advantage of potential savings on payroll taxes.

Partnership tax is extremely complex, but you're correct on the payroll tax savings with the S-corp.

IRS says a husband and wife "qualified joint venture" can choose not to be taxed as a partnership and therefore avoid that complexity.

For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are a husband and a wife filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.

http://www.irs.gov/businesses/small/art ... 76,00.html

[deathb4disco]

IRS says a husband and wife "qualified joint venture" can choose not to be taxed as a partnership and therefore avoid that complexity.

You can, but I've never seen it done in 25+ years as a CPA. I just checked with two other CPAs, and they'd never seen it done, either.

If you make the election, you don't have the liability protection you get with an LLC/S-corp.

[spandit]

Thanks tfb & deathb4disco for the responses. Thanks for the link to the book tfb, it seems like it has what I need.

I'm certainly leaning towards the LLC, especially since it's possible to elect S-corp status if necessary. Don't worry deathb4disco, I'm not about to attempt doing that return myself!

[jared]

I recently moved from California, where my wife and I ran an S-corp, to Pennsylvania, where some of our colleagues are telling us to start an LLC. It looks like we could do either here in PA. So, does anyone have any advice about the pros and cons of both?

What does your attorney say? Is there a reason you can't or shouldn't continue to operate as an S-corp?

In Cali, we set up a payroll system and we were the employees. It seems that is not necessary with an LLC. However, I am not exactly sure how to pay ourselves. And, I would assume we make quarterly tax payments if we aren't running a payroll, correct?

Will both of you be members of the LLC? If so, a multi-member LLC is taxed as a partnership by default, so you wouldn't be on the payroll unless you elect to be taxed as an S-Corp.

I think I know the answer to this one: Will I still need an accountant if we set up an LLC?

Yes, I would highly recommend working with a tax professional. I would also recommend meeting with an attorney that specailizes in this area to make sure things are setup properly. There are many things to consider when forming an entity (liability protection, tax treatment, ownership, etc.).

Not an expert but I heard LLC is simpler but S-Corp has the advantage of potential savings on payroll taxes.

The same can also be achieved with LLC taxed as S-corp.

IRS says a husband and wife "qualified joint venture" can choose not to be taxed as a partnership and therefore avoid that complexity.

That's not what IRS says if husband and wife are operating as an LLC (unless in a community property state), although I'm not sure how they are justifying their position.

A qualified joint venture is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a husband and wife who file a joint return, (2) both spouses materially participate in the trade or business, and (3) both spouses elect not to be treated as a partnership. A qualified joint venture, for purposes of this provision, includes only businesses that are owned and operated by spouses as co-owners, and not in the name of a state law entity (including a limited partnership or limited liability company).

A business owned and operated by the spouses through a limited liability company does not qualify for the election
Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election. See Rev. Proc. 2002-69, 2002-2 C.B. 831, for special rules applicable to husband and wife state law entities in community property states.

[tfb]

That's not what IRS says if husband and wife are operating as an LLC (unless in a community property state), although I'm not sure how they are justifying their position.

Got it, thank you.

[billern]

IRS says a husband and wife "qualified joint venture" can choose not to be taxed as a partnership and therefore avoid that complexity.

You can, but I've never seen it done in 25+ years as a CPA. I just checked with two other CPAs, and they'd never seen it done, either.

If you make the election, you don't have the liability protection you get with an LLC/S-corp.

Many states provide the same legal protection to single member LLCs. Being a disregarded entity for tax purposes does not negate the liability protection of an LLC as long as your state recognizes single member LLCs.

[Jack]

LLC vs S-corp? Depending on the nature of your business it might be neither.

An LLC or corporation provides less liability protection than most people think. Mainly they provide protection for contractual liability -- borrowing large amounts of money from a bank, credit provided by inventory suppliers, or long term leases for equipment or offices. In other words, it protects you personally if you default on contracts signed in the name of your company or company debts.

However, for most small businesses, creditors will not provide credit only in the name of the company and require you to sign for personal liability anyway, so the LLC or corporation provides little protection against debts.

An LLC or corporation does not prevent you from being sued for your own actions -- an auto accident, personal harm or injury, professional errors, negligence, defamation or malpractice. An LLC or corporation does not protect you against many of the torts that most people are afraid of. For that you need business insurance, malpractice insurance or errors and omissions insurance.

So if you are not in a business that requires contractual debt liability but instead you are most concerned about torts, then your business organization and accounting may be much simpler if you avoid an LLC or corporation and instead get adequate business insurance. It depends on the nature of your business.

You don't need an LLC or corporation to take business deductions. You don't need an LLC or corporation to take advantage of various retirement accounts.

[Laminar]

No need to chose as you have the option be be an LLC that elects to be taxed as an S-corp and then you can have the best of both worlds. An LLC is a disregarded entity for tax purposes so you have the option of being taxed as SP/Partnership, S-corp, or even C-corp I believe. Whether of not you should chose to make an S-corp election will depend on the nature of you business and simplicity you desire. By electing to be taxed as an S-corp you must pay yourself a "reasonable" salary that is subject to employment taxes. The definition of reasonable is a bit grey and thus an area that many taxpayers have been able to abuse in the past (although the IRS is starting to crack down). Whatever profit remains flows to the owners as a dividend and is not subject to employment tax. On the other hand if your LLC does not make the S-corp election it will be treated as a partnership and all profits will be considered compensation and be subject to employment tax. If the only employees are the owners and all of the revenue is derived from providing a service and you not want to get in the "Grey Area" with the IRS you should probably consider all your profit as compensation and pay the employment tax in which case making an S-corp election is unnecessary and just creates more complexity. On the other hand if you have a bunch of employees and capital intensive business (e.g. manufacturing) you can make a good case that a lot of your profit is not employment compensation, but rather a return on your investment and should be considered a dividend. Another consideration is whether you will have losses in your early years. If so, the LLC allows you to flow through all of these losses, while a an S-corp can be more restrictive. As such, it could be wise to not make an S-corp election until you are profitable and earning more than what you could consider a "reasonable" salary.

[Timmay!]

An LLC or corporation does not prevent you from being sued for your own actions -- an auto accident, personal harm or injury, professional errors, negligence, defamation or malpractice. An LLC or corporation does not protect you against many of the torts that most people are afraid of. For that you need business insurance, malpractice insurance or errors and omissions insurance.

+1

This is great advice Jack. Too many individuals are misinformed of the so-called liability protection of LLCs or Corporations, especially when it's a 1 or 2-person business. Sole Proprietorship with the proper insurance is sufficient in many instances.

[deathb4disco]

Many states provide the same legal protection to single member LLCs. Being a disregarded entity for tax purposes does not negate the liability protection of an LLC as long as your state recognizes single member LLCs.

True, but I read the OP as saying he would own the entity equally with his wife. Therefore, a SMLLC would not be an option.

[spandit]

Thanks for the great advice jack. My wife and I are insured well above the minimums on liability insurance.

Currently we get personal liability for each of us under our own names. Would there be any advantage to getting the insurance under the name of the company?

Also, thanks for clarifying the fact that business deductions will still be valid under all of these structures.