|
|||||||
 |
|
|
Thread Tools | Search this Thread | Display Modes |
06-03-2008, 02:00 AM
|
#1 |
|
Registered User
Join Date: Mar 2007
Posts: 9
|
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. |
|
|
|
06-08-2008, 01:48 PM
|
#2 |
|
Registered User
Join Date: Jan 2007
Posts: 46
|
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. |
|
|
|
|
10-13-2008, 02:30 PM
|
#3 |
|
Registered User
Join Date: Aug 2008
Posts: 135
|
You have to remember that an LLC does not enjoy any passthrough earnings or losses unless an election was made to do so on form 8332 or form 2553.
One major advantage of forming an LLC versus a corporation is that an LLC is usually not held to the same state specific standards of operation/formalities like that of a corporation. For example: An LLC is not an incorporated entity with the state so there are usually no requirements to have meetings/minutes or many other formalities that corporations are burdened with. Another huge advantage of operating an LLC is the flexibility of taxation as you move through the business cycle. An LLC does not exist in the IRS's eyes until the first return is filed, or until the election to be taxed in a certain way has been made. An LLC can be federally taxed in 4 different manners; as a sole proprietorship which is the default if the LLC has a sole member, a partnership which is the default if the LLC has more than one member, a C corporation or an S corporation. You can form an LLC and in the first year elect to be taxed as a sole proprietorship to avoid basis restrictions on flow through losses and in the second year make an election to be taxed as an S Corporation. Once the election to be taxed as a S Corporation is made, any revocation thereafter can limit the opportunity to be taxed as an S corporation for 5 years. The biggest benefit of forming an LLC is the flexibility of choosing the way your company will be taxed. |
|
|
|
|
11-04-2008, 03:20 AM
|
#4 |
|
Registered User
Join Date: Mar 2007
Posts: 9
|
Thanks for the replies. The auto-notify isn't working for me on this forum.
Regarding maxwell's response... Real estate is only considered a passive activity if the taxpayer does not materially participate, or if it involves rental property, which is passive by definition. Land development is not a passive activity. But if a developer holds land and does not develop, it could be subject to investment rules regarding losses. I had the wrong idea about S-Corp dividends. C Corp dividends are paid with after-tax money so, there IS double taxation (although the rate was reduced to 15% for individual recipients in 2003, IIRC). Your comment suggests distributions from an S-Corp are paid with after-tax dollars. I wasn't aware of that. I guess that's why they're called distributions instead of dividends. Regarding youbetcha's response... Nor was I aware that an LLC could elect to pay tax as a corporation (S or C). I'm clearly in over my head as I make this decision. It's time I meet with a tax adviser. |
|
|
|
|
01-26-2009, 08:18 PM
|
#5 |
|
Registered User
Join Date: Jun 2007
Posts: 16
|
maxwell50 is dead on. One thing to consider additionally is that if you do decide to form an S-Corp then you should probably also talk to your tax advisor about forming an LLC and then electing for the LLC to be taxed as an S corp. This is called an LLC Envelope by some CPA's and tax attorneys and all you really need to do after forming the LLC is file forms 8832 and 2553.
|
|
|
|
|
«
Previous Thread
|
Next Thread
»
| Thread Tools | Search this Thread |
| Display Modes | |
Linear Mode
|
|
Similar Threads
|
||||
| Thread | Thread Starter | Forum | Replies | Last Post |
| Tax question... | quindelljohnson | Taking Care of Business | 1 | 04-19-2007 12:29 AM |
| subchapter s question | denny | TAXES | 1 | 02-01-2005 10:29 AM |
| Annuity Question (upon retiring) Answered | pricespector | RETIREMENT | 0 | 08-25-2004 04:03 PM |
| question about the change of 529 plan in several states! | anonymous | 529 Plans | 1 | 06-22-2003 07:17 PM |
SPONSORED LINKS
Powered by: vBulletin Version 3.0.1
Copyright ©2000 - 2009, Jelsoft Enterprises Ltd.
Copyright ©2000 - 2009, Jelsoft Enterprises Ltd.