Subchapter S vs. LLC question

I've been a sole proprietor (consultant) for 25 years. However, I recently purchased some land and will be developing lots for sale. As I will be exposed to new potential liabilities and risks, I need to create a more formal business structure. I'm considering a Subchapter-S or a Limited Liability Company. I'm the sole owner and have no employees.

Based on what I've read, more and more small companies are organizing as LLC's. But I don't want to make a decision without understanding the trade-offs.

As I understand it, one of the differences is that a Subchapter S Corp can pay dividends in lieu of salary, with limitations, thus avoiding payroll taxes, whereas an LLC cannot pay dividends. But is this really an advantage? Aren't dividends double-taxed, whereas salaries are pre-tax, and thus only taxable to the employee?

Informed advice would be appreciated.

Firstly, if you plan to own land, use an LLC, not an S-Corp. Real estate can subject you to passive income, and if you get in a situation where too much of your income is categorized as "passive", the IRS may convert your S-Corp into a C-Corp, subjecting you to double taxation.

There is no logical reason why the law is written this way, and the law should be fixed, but congress is evidently too busy dealing with other things, and can’t be bothered to fix this problem. LLCs do not have the problem of passive income limitations.

Next, to answer your question: I have never called distributions in my S-Corp "dividends". I just call them shareholder distributions. It is like transferring money out of a sole proprietorship, and it doesn't affect your taxes one way or the other.

Lastly, if you own your S-Corp, and you run the company, you really should take a reasonable salary. If the IRS finds out that you are only taking distributions as if you are just a silent investor, and you aren't taking a salary, they are going to come after you for evading FICA taxes. Specifically, they will re-categorize some of your distributions into salary, and then assess FICA taxes.

John Edwards took a reasonable salary of $35K from his S-Corp, and took distributions of $500K. So it you consider him to be the benchmark of what is reasonable, do what he did.

LLC's and sole proprietors don't have an issue with reasonable salaries, because ALL non-passive business income is subject to FICA (aka self employment tax), which is frankly worse for the taxpayer, and better for the IRS. At least an S-Corp lets you limit the amount of FICA tax you pay.

Hope all this info is helpful.