For A Small Retail Business, Which Is Better A Llc Or S-corp As Far As Taxes Are Concerned.

[Xylon]

We are in the process of purchasing this business. It is located in North Carolina. My husband and I are the only workers.

[Cairo]

newbie5148300 said: 1 curiouskitty, regarding your answer "The LLC combines the tax advantages of a sole proprietorship or partnership with the liability protection of ...":Thanks so much for your in depth answer-it is greatly appreciated.One more question if you don't mind, this will probably complicate things even more. We may need to convert our 401k to a self directed fund in order to help finance the business we are trying to purchase. Doesn't that require that we set up a C-Corp, or is a S-Corp ok??? 75 months ago

[Maccus]

Generally, the S-Corp will provide you with more flexibility for tax planning. However, an LLC simplifies your return. As an LLC, you can file a simple Schedule C with your Form 1040.  Recent tax law changes allow a husband wife who are both active owners in a business to forgo the Form 1065(Partnership) return and elect to report each spouse's share of income and expenses on 2 Schedule Cs(or one if the profits are split 50/50).  A S-Corp will have to file the more complex Form 1120-S.   The main benefit an S-Corp has is that for Federal purposes, the net income is only subject to ordinary income tax.  Conversely, an LLC(unless it specifically elects to be taxed as a corporation) that has a net profit for the year will mean that the partners will be subject to both income and self-employment tax(approximately 15% of net income).   LLC's with only husband and wife owners on the books do not have to deal with payroll tax returns like S-Corporations do.  Regardless of how much income is paid to the LLC owners, it is the profits that determine how much income(and self-employment tax) is due.  S-Corporation owners are employees of the corporation and must run a formal payroll including filing Forms 940, 941, Form W-2 and complete all required state forms for withholding taxes and unemployment.  One area the IRS is "cracking down" on is unreasonably low salaries being paid to S-Corporation owners.   The ability to receive health insurance as a tax-free fringe benefit is not an option on either entity.  If an S-Corporation pays for health insurance of a shareholder who owns 2% or more of the corporation, that the cost of the premium must be added to the shareholder's wages.  Owners of either entity are allowed to deduct their premiums on Form 1040 as "self-employed health insurance".   Both entities can maintain solo 401(k) plans or SEP plans which allows you to deduct(either on your personal return or your S-Corp return) retirement contirubtions.  As an LLC, the maximum you can contribute is approximately 20% of the LLC's profits.  As an S-Corp, you can contribute up to 25% of your W-2 salary.   Depending on the size of your S-Corp you may need to maintain books that will be able to produce a balance sheet at the end of the year in addition to a profit and loss statement.  The balance sheet is required when gross sales are $250,000 or more in the tax year.  Hire a good bookkeeper or maintain good books with QuickBooks by Intuit.   Another area that S-Corp owners often forget is that the money in the checkbook belongs to the corporation.  Any withdrawals from the corporate accounts must be classified as salaries, reimbursements, loans to shareholders or return of capital.  LLC owners can essentially withdraw cash from the LLC checking account with little accounting or tax considerations.   Finally, check with your state Department of Revenue.  Many states have annual fees for both LLCs and S-Corps.  In Massachusetts, it evens out because the S-Corp tax due with the return is generally $456 plus $100 annual filing fee.  For LLCs, they only pay an annual filing fee of $500 so it pretty much evens out.  However, looking at the regulations for North Carolina S-Corps, you have to pay a minimum tax of $35 but that can increase based upon your undistributed profits or taxable tangible personal property.    My best advice, visit the National Association of Enrolled Agents(www.naea.org) and click on "Find and Enrolled Agent".  Enrolled Agents(or EAs) are tax pros licensed by the IRS.  They specialize in tax issues related to individuals, partnerships/LLCs, corporations and trusts.  They are the tax experts and must pass a rigorous 2-day examination administered by the US Treasury Department.  They must pass a stringent background check and be fingerprinted.  Most importantly, they have minimum annual continuing education requirements including mandatory ethics training.  This is no profession for ameteurs!  We EAs take our job very seriously!   I hope this helps!   Dave   IRS CIRCULAR 230 DISCLOSURE To ensure compliance with new requirements of the Internal Revenue Service, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of(a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or(b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication. Sources: 10+ years as an IRS-licensed Enrolled Agent   TaxProInMass's Recommendations Quickbooks Pro 2008 Amazon List Price: $199.95 Average Customer Rating: 4.5 out of 5(based on 15 reviews) The best $200 you will spend on your business!   TaxProInMass's Recommendations JK Lasser's Small Business Taxes 2007: Your Complete Guide to a Better Bottom Line(J K Lasser's New Rules for Small Business Taxes) Amazon List Price: $17.95 Used from: $11.45 Average Customer Rating: 5.0 out of 5(based on 2 reviews) This is the small business person's bible! TaxProInMass 75 months ago Please sign in to give a compliment. Please verify your account to give a compliment. Please sign in to send a message. Please verify your account to send a message.

[Rocke]

curiouskitty said: 2 Hi newbie5148300. Wish I could be of more help, but this beyond my limited knowledge. Time to consult the pros. Good luck!!! :) 75 months ago

[Holwell]

As an LLC, you can file a simple Schedule C with your Form 1040.  Recent tax law changes allow a husband wife who are both active owners in a business to forgo the Form 1065(Partnership) return and elect to report each spouse's share of income and expenses on 2 Schedule Cs(or one if the profits are split 50/50).  A S-Corp will have to file the more complex Form 1120-S.   The main benefit an S-Corp has is that for Federal purposes, the net income is only subject to ordinary income tax.  Conversely, an LLC(unless it specifically elects to be taxed as a corporation) that has a net profit for the year will mean that the partners will be subject to both income and self-employment tax(approximately 15% of net income).   LLC's with only husband and wife owners on the books do not have to deal with payroll tax returns like S-Corporations do.  Regardless of how much income is paid to the LLC owners, it is the profits that determine how much income(and self-employment tax) is due.  S-Corporation owners are employees of the corporation and must run a formal payroll including filing Forms 940, 941, Form W-2 and complete all required state forms for withholding taxes and unemployment.  One area the IRS is "cracking down" on is unreasonably low salaries being paid to S-Corporation owners.   The ability to receive health insurance as a tax-free fringe benefit is not an option on either entity.  If an S-Corporation pays for health insurance of a shareholder who owns 2% or more of the corporation, that the cost of the premium must be added to the shareholder's wages.  Owners of either entity are allowed to deduct their premiums on Form 1040 as "self-employed health insurance".   Both entities can maintain solo 401(k) plans or SEP plans which allows you to deduct(either on your personal return or your S-Corp return) retirement contirubtions.  As an LLC, the maximum you can contribute is approximately 20% of the LLC's profits.  As an S-Corp, you can contribute up to 25% of your W-2 salary.   Depending on the size of your S-Corp you may need to maintain books that will be able to produce a balance sheet at the end of the year in addition to a profit and loss statement.  The balance sheet is required when gross sales are $250,000 or more in the tax year.  Hire a good bookkeeper or maintain good books with QuickBooks by Intuit.   Another area that S-Corp owners often forget is that the money in the checkbook belongs to the corporation.  Any withdrawals from the corporate accounts must be classified as salaries, reimbursements, loans to shareholders or return of capital.  LLC owners can essentially withdraw cash from the LLC checking account with little accounting or tax considerations.   Finally, check with your state Department of Revenue.  Many states have annual fees for both LLCs and S-Corps.  In Massachusetts, it evens out because the S-Corp tax due with the return is generally $456 plus $100 annual filing fee.  For LLCs, they only pay an annual filing fee of $500 so it pretty much evens out.  However, looking at the regulations for North Carolina S-Corps, you have to pay a minimum tax of $35 but that can increase based upon your undistributed profits or taxable tangible personal property.    My best advice, visit the National Association of Enrolled Agents(www.naea.org) and click on "Find and Enrolled Agent".  Enrolled Agents(or EAs) are tax pros licensed by the IRS.  They specialize in tax issues related to individuals, partnerships/LLCs, corporations and trusts.  They are the tax experts and must pass a rigorous 2-day examination administered by the US Treasury Department.  They must pass a stringent background check and be fingerprinted.  Most importantly, they have minimum annual continuing education requirements including mandatory ethics training.  This is no profession for ameteurs!  We EAs take our job very seriously!   I hope this helps!   Dave   IRS CIRCULAR 230 DISCLOSURE To ensure compliance with new requirements of the Internal Revenue Service, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of(a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or(b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

[Jarah]

Overall, I would do the LLC. The short answer is to go with the LLC. So many things can come into that decision though. A link that I found very very helpful when I was doing research on this for my business is found here:http://entrepreneurs.about.com/b/a/122155.htmHe does a very good job of explaining the differences of the two. If taxes are your biggest concern, it almost always makes more sense to do the LLC, unless your profits get really high.here is a relevant exceprt from the link dealing with the tax issue:"So purely based on taxation considerations, if you?re expecting to make about fair market salary or less, you?re probably better off with the LLC. If you expect profits to be enough higher than fair market salary to justify the additional payroll record-keeping costs, then S-corp makes more sense. There are also some differences in flexibility re: ownership, but those generally only apply with larger numbers of shareholders."Hope this helps, and best of luck in making your decision! Sources: http://entrepreneurs.about.com/b/a/122155.htm msujrod 75 months ago Please sign in to give a compliment. Please verify your account to give a compliment. Please sign in to send a message. Please verify your account to send a message.

[therron57]

The LLC combines the tax advantages of a sole proprietorship or partnership with the liability protection of a corporation. The profits of a C corporation are taxed first at corporate tax rates. Then, if the C corporation pays dividends to shareholders, those dividends are taxed a second time at the personal income tax rates of the shareholders. This "double taxation" is avoided by the pass-through nature of LLC taxation. The Internal Revenue Service(IRS) does not consider an LLC itself to be a taxable entity. Instead, the company?s earnings "pass through" to the owners, who report their share of profits or losses on their individual tax returns. Only one personal tax return for each member is required, and the company?s earnings are taxed only once. In a C corporation, dividends to shareholders must be distributed in proportion to the number of shares they own. This is true regardless of the amount of effort an owner put into the business. In contrast, LLC owners can split profits or losses in any way they choose. An LLC owner who owns 50% of the company may actually receive more or less than a 50% share of the profits or losses. This scenario, called a "special allocation," must be accomplished in accordance with IRS regulations. Small business owners should consult their accountant or tax advisor for specific guidance regarding special allocations. Small business owners who want the flexible structure of an LLC but the advantages of corporate taxation can elect for their LLC to be taxed as a corporation. To elect corporate taxation, owners file Form 8832, "Tax Classification Election," with the IRS. This election may allow LLC owners to save on taxes. With corporate taxation, the first $75,000 in income is taxed at corporate tax rates, which are generally lower than the individual tax rates assessed on LLC owners. Electing this status may also make an LLC eligible for certain deductions available only to corporations. For specific guidance, small business owners should consult their accountant or tax advisor regarding this election.

[Gavino]

The short answer is to go with the LLC. So many things can come into that decision though. A link that I found very very helpful when I was doing research on this for my business is found here:http://entrepreneurs.about.com/b/a/122155.htmHe does a very good job of explaining the differences of the two. If taxes are your biggest concern, it almost always makes more sense to do the LLC, unless your profits get really high.here is a relevant exceprt from the link dealing with the tax issue:"So purely based on taxation considerations, if you?re expecting to make about fair market salary or less, you?re probably better off with the LLC. If you expect profits to be enough higher than fair market salary to justify the additional payroll record-keeping costs, then S-corp makes more sense. There are also some differences in flexibility re: ownership, but those generally only apply with larger numbers of shareholders."Hope this helps, and best of luck in making your decision!

[Sanders]

curiouskitty, regarding your answer "The LLC combines the tax advantages of a sole proprietorship or partnership with the liability protection of ...":Thanks so much for your in depth answer-it is greatly appreciated.One more question if you don't mind, this will probably complicate things even more. We may need to convert our 401k to a self directed fund in order to help finance the business we are trying to purchase. Doesn't that require that we set up a C-Corp, or is a S-Corp ok???

[Judd]

The LLC combines the tax advantages of a sole proprietorship or partnership with the liability protection of ... The LLC combines the tax advantages of a sole proprietorship or partnership with the liability protection of a corporation. The profits of a C corporation are taxed first at corporate tax rates. Then, if the C corporation pays dividends to shareholders, those dividends are taxed a second time at the personal income tax rates of the shareholders. This "double taxation" is avoided by the pass-through nature of LLC taxation. The Internal Revenue Service(IRS) does not consider an LLC itself to be a taxable entity. Instead, the company?s earnings "pass through" to the owners, who report their share of profits or losses on their individual tax returns. Only one personal tax return for each member is required, and the company?s earnings are taxed only once. In a C corporation, dividends to shareholders must be distributed in proportion to the number of shares they own. This is true regardless of the amount of effort an owner put into the business. In contrast, LLC owners can split profits or losses in any way they choose. An LLC owner who owns 50% of the company may actually receive more or less than a 50% share of the profits or losses. This scenario, called a "special allocation," must be accomplished in accordance with IRS regulations. Small business owners should consult their accountant or tax advisor for specific guidance regarding special allocations. Small business owners who want the flexible structure of an LLC but the advantages of corporate taxation can elect for their LLC to be taxed as a corporation. To elect corporate taxation, owners file Form 8832, "Tax Classification Election," with the IRS. This election may allow LLC owners to save on taxes. With corporate taxation, the first $75,000 in income is taxed at corporate tax rates, which are generally lower than the individual tax rates assessed on LLC owners. Electing this status may also make an LLC eligible for certain deductions available only to corporations. For specific guidance, small business owners should consult their accountant or tax advisor regarding this election. Sources: http://www.llc.com/LLC_vs_C_Corporation.html?utm_source=msn&utm_medium=ppc curiouskitty 75 months ago Please sign in to give a compliment. Please verify your account to give a compliment. Please sign in to send a message. Please verify your account to send a message.