Single Member Llc Can Elect S-corp Status?

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s About Taxes)/Single member LLC can elect S-Corp Status? Advertisement Follow-Ups to

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from Expert Richard FritzlerCorporate and Tax Attorney wrote at 2006-09-29 14:58:34

From a legal and tax perspective, this article is stunningly inaccurrate.  While there may be some vartiation in the deductions available to various entities, the author ignores several key factors, including:1. A single member LLC MAY elect to be taxed as a corporation, and may then elect to be taxed as an S Corporation.  The author is simply wrong.2. The double tax on C Corporations(what the author calls a "real corporation").  In other words, a C corporation pays tax on its income.  Then when the C corporation distributes the income to the shareholder, it is taxed a second time, as a dividend.  Thus, your 15% initial tax rate, when distributed.  If you distribute $30,000 in income, you then pay approx 30% on that income(15% in corporat income tax and 15% on the distributed dividend).  In short, you have two options,(i) pay a smaller corporate rate on dollars that you cannot get out of the corporation without seing subject to a second tax, or(ii) pay yourself all corporate profits as salary.If you elect to pay yourself through salary to avoid the C Corporation double tax, then you lose any ability to distribute money without FICA, FUTA, and other payroll taxes.3.  LLC's in most states, are granted personal liability protection roughly equal to that granted to corporations.  Therefore, if your business is sued, either a corporation or an LLC, if properly run, offers protection of your personal assets.Please seek competent legal and tax advice from a qualified CPA or tax attorney on these issues.  The advice provided in the initial author's response set forth above is incomplete and incorrect. Richard Fritzler wrote at 2006-12-20 01:44:36

Well this sound familiar, let me address each of these points. This will be long, so that I can address the variables, but for those of you that have been hearing this accounting dogma for years, I'll try to dispel the myths.1. Yes, a single member LLC can petition the IRS to be treated as a corporation. But, if that is what you wanted, why not make that direct step, instead of dancing around to it. If you want a green truck to hall hay, then why buy a brown SUV, chainsaw the backend to create an open area, grind out the rough spots, paint it green, then decide it looks like crap and start over?If your goal was to be treated as a Sub-S, why not just start there?2. On point the only thing that is double taxed is a dividend. So . . . let's start with don't pay dividends.May I correct your math error: 15% federal and 15% dividend tax is not 30%? Out here in the real world we use a phrase "Net-Net" that means of the $30,000 the corporation would pay 15%, leaving only $25,500 of dividend, so the tax would be calculated on that at 15% or it would leave $21,675. Sorry to insert real world realities into your argument, but for those business owners out here, who deal with the real world every day, these little details are important.So let's say we did take every nickel out of the corporation as a dividend which you claim is terrible and I feel is not good. Your $30,000 dollar example would result in a net spendable amount of $21,675. If we use a Sub-S, what can we expect to spend? Well there is the Income tax, that's 15%, and at only $30,000 of total net cash flow we will have to take it all as payroll so we have the payroll taxes that will exceed 15.3% now your Gross-Gross math would work, so you would get to spend $20,910. Hmmm, how is it that your way is better?I will pause to allow you to respond with "But you have to get the money out, and that only leaves Payroll".To which I respond, first, the corporation has far more deductions. So if you want a benefit rich environment, a Real Corporation is your best option. Some of the "vatriation(sp) in the deductions" include the real corporation being able to pay for 100% of all of your medical expenses AND pay not tax. Whereas less than 2% of all personal tax returns filed are eligible for medical deductions. Other legitimate business deductions, Life insurance, Auto insurance, Business Travel, Education, and the list goes on. Then, when you say "alright it is true that if the corporation keeps the money and spends it on tax deductible items it pays no tax on those purchases, BUT what about the rest of the money, it will be either taxed twice or have to pay payroll tax".I would then say you probably don't need the money out. If you just wanted to put it in a bank account the corporation will have a far bigger balance in the savings account than you will, since although you may avoid the payroll taxes you still pay all of the personal incomes taxes on the "extra profits"(money the business made that is not needed to pay business expenses or to pay for necessary personal expenses) whereas the corporation has a far lower tax rate. Let's Say there is $20,000 of extra profit, if a Real Corporation kept that money the federal tax rate would be 15%. If you take personally, and you've already taken enough money to pay for your personal expenses, that $20,000 is going to be taxed at 25%, or 28%, or 33%, or 35%. Hmmm, 15%, or more, which is the better tax rate? I know in Corporate and Tax Attorney School they didn't spend too much time on math, I'll help you, 15% is significantly less than the others. If you invest $17,000 in an interest bearing savings account earning 5%, or you invest $13,000 in an interest bearing savings account at 5%; at the end of the year, which will be bigger?And you immediately scream "but you still need to take the money out personally so it'll still be taxed again".And I respond with: as I said before: "you probably don't need the money out". What are you going to do with it? Do you want to invest in the stock market? Well, as we have already shown the corporation will have more money to invest in the stock market out of the $20,000 since they pay a lower tax; AND if the stock market investment grows, the profits, whether gains or dividends will be taxed lower.Stick with me for a minute, I'll go slowly. The corporation will be more profitable in every investment than you will personally."Okay, you admit, yes the business will be more successful at what ever it invests in, and yes the corporation can write off more than I can personally, and I'll have a bigger piggy bank, But". . . "You still can’t enjoy the money!"Well, I don't know about you, but I don't enjoy money, I can only enjoy what the money can buy. For instance, I'd like to travel more. So, I could either take more income that I can pay miserable tax rates on, or my business model may require that I go on more business trips. In fact, since I incorporated my Dry-Cleaning Business we've paid less in taxes so I've actually saved some money, I started with just a savings account and since the tax rate on the interest was lower the money grew so fast that I had enough to open a stock brokerage account, I made some stock investments, and started getting dividends, and the effective tax on those is only 4.5% so my stock portfolio is kicking butt. Now we want to diversify, and we are thinking about investing in real estate. I don't put all your eggs in one basket. So we want to start small, we don't want to have a lot of management issues, and I've heard horror stories about tenants. But we want it to be a really nice place, really world class. So in looking, we see these "time shares" where it is a world class resort, they keep them up, they handle all the bookings, they even clean the rooms when people leave. So that is what our corporation is going to invest in, a time share. The only question left is which one? I guess well start looking. I think we'll start in Hawaii, and then we can compare it to the Caribbean, but there are so many islands, which one is best. This is going to be a big project; we could be figuring this out for years.3. You seem to run a little rough shod over the vernacular. When you use the word "granted", do you mean the courts have blessed all LLC with a free pass within the walls of the courtroom, or do you mean the LLC "Claims" roughly equal liability protection. You may not know this, but legislation is not the "application" of the law. The application of the law only comes from the courts. And the courts don't "Grant". They either "Allow" or "Deny" the "CLAIMS" of the participants. And the courts are doing some of that denying stuff.(Water, Waste and Land v Lanham)At this point you have either quit reading, have stubbornly ignored the truth, or are now honestly questioning how and why you and so many others have been making the same dog tired recommendations; Even when there isn't a shred of math or logic that supports your recommendation.I can tell you, do you want to know.At this point you can Intentionally Incompetent or Consciously Competent. It is your choice.The reason that you and many other “Tax Authorities” recommend a Sub-S is based upon 2 flawed assumptions:First as we have explored above you operate on the flawed assumption that you want to put all the money in your own pocket and that the business owner does too. That is inherently false. To start the business owner wants to put it back into the business, maybe to buy more inventory, well a real corporation will buy more new inventory out of the same amount of sales than a sole prop or Sub-S. Even after the business is roaring, he still doesn’t need the money, only what the money can buy.And the second flawed assumption is it even more demeaning to the business owner: It is a startup recommendation. And what do we know about startups? They Fail. And so the logic goes that “since you WILL fail, doing business as a pass through entity, will allow to take that loss and try to write it off against your ordinary income, when you come to your senses and get a real job”.I imagine you are an intelligent guy, and that you honestly want to do what is best for your client. But you didn’t find these discussion points in the latest tax preparer journal, and so you are hesitant to consider much less make the recommendation of doing business as a Real Corporation.There are 2 types of tax professionals that give advise on business structure, the first is the strip mall accountant, working with a 1970’s mentality about tax planning reading what is written by other 1970’s strip mall accountants. Eaking out a meager living working 18 hr days for 4 months out of the year doing $40 tax returns, and then taking part time jobs the rest of the year to make ends meet. And the advise has always been. . . Then there are the other types of tax professionals, the problem is that the average business owner can’t ask the advice of this class of tax professional. You see these guys get paid very well to spend there time researching the truly best way to run a successful business. They aren’t sitting in a strip mall hoping that some poor soul just got done grocery shopping and saw the sign in the window. These guys don’t write articles for the strip mall accountants to read, they realize that what they know is precious and valuable and they give it only to those that can truly afford the best.These are the accountants that work for large corporations. And everyone of them has recommended that their client be a Real Corporation.I can actually be a nice guy, if you want to call me, I’ll talk to you.RichardMark wrote at 2007-07-26 00:18:25

Not to be rude, but Mr. Fritzler's answer is inaccurate and flat out wrong on several points.  An LLC can elect to be treated as an S corporation.Mr. Fritzler also seems to miss the fact that if your a profitable "real" corporation, you will be paying a federal tax of 35% at the corporate level, which leaves you with 65% of your profit, and then an additional federal tax of 15% at the individual level, leaving you with around 55% of your profit.  You then have state taxes on top of that.In short, I would recommend you contact your tax advisor. Richard Fritzler wrote at 2007-08-15 20:40:14

Mark,When you say that a "profitable "real" corporation" pays 35% at the corporate level, you are shooting pretty high. There are only 2 ways to get there, the first is to make over $18,333,333 of net profit, that is 18 million. And I agree that would be profitable, but most of these readers may be working with smaller numbers. the first $50,000 is only taxed federally at 15%. And the Average tax on the first $100,000 of true net profit is only 22.25%.then you jump to the assumption that the entire amount will be paid out in dividends. Even if that were true, the average tax would be 28.5% total, 15% corporate and 15%(of the net 85%) as a dividend. Whereas for all other business forms, the first $50,000 would be taxed at(at least) 30.3%(federal low income rate of 15% and the payroll taxes on the gross amount of 15.3%).but as I have sated over an ove again, there is no requirement to pay dividends. Now if the Real Corporation recieves the income and because it has favored status when it comes to deductions, it spends part, most or all of the money on tax deductible items, then it would have a lower, lowest, or no tax due.Hmmm, that sure seems better to me.Richard Fritzler