-
LLC. v INC.
-
[Fantastic Plastic Entertainment, Inc.] “You do that at the end of the year by basically getting rid of cash… buy needed equipment, salary bonuses for employees, or pay dividends to shareholders (which hopefully primarily will be you).”
Paying out cash to the owners of an S corp doesn’t have any affect on profits. It’s simply a return of the income that the owners were already taxed on (or will be, if it’s current year profits). Hence, it’s a non-taxable distribution. The other stuff will work, though.
[Fantastic Plastic Entertainment, Inc.] “Another thing to note… some people can’t decide whether to incorporate as an S-Corp or a “regular” full corporation. If you incorporate as an S-Corp, you can convert it to a regular corp later… but you can’t go the other way around.”
This statement is incorrect… you can convert from a regular “C” corp to an S corp. It carries with it some caveats regarding the types and amounts of income that you can earn as an S corp, but it can be done. However, converting from an S corp to a C corp is much easier. For a single owner running a business, there’s almost no reason to incorporate as a C corp. If your business expands and you need to bring in many investors, a C corp might be the way to go (an S corp has limitations on the number of shareholders, as well as the type of shareholder). However, C corps suffer from double taxation of income – net income is taxed once at the entity level and then again to the shareholders as a dividend when they take a distribution of that profit in cash or property. S corps pass all their income through to the shareholders, so it’s taxed only once (except if the state has an S corp tax – see my example of CA below).
To the original poster, if you don’t like writing a big check to Uncle Sam at tax time, you need to update your accountant throughout the year as to your expected income so that he/she can update the projections of your tax liability. It sounds like you didn’t do that.
The decision of LLC or S corp isn’t an easy one. You should really speak to a CPA and/or an attorney that can look at your situation in detail and recommend a course of action based on the laws of your state. I know from your profile that you’re not in California, but I am, so I’ll give you an example of some of the differences in CA. Your state may have similar provisions. California imposes an LLC fee based on the gross receipts for the year. This means that even if you sustain a net loss, you can still get hit with a fairly substantial bill. A California S corp pays an entity level tax of 1.5% to the state based on net income. This difference in entity level taxes/fees is just one thing to take into account along with the differences in legal protection and other requirements (such as the required corporate records and so on).
Disclaimer: This post is not intended to be tax advice. See a professional who is familiar with the laws of your state.
-
Wow… The most concise and nearly understandable (my ignorance, not a slam) post yet! I do appreciate that knowledge. I actually did update my tax advisor, but it was September and she recommended buying tons of equipment. I didn’t really need any and thought better about buying stuff I wouldn’t necessarily use or need. I max out my SEP and I can knock it down a bit, but not much.
I will be discussing this with a CPA, but I appreciate the input. I just have this feeling that there’s not right or wrong answer…. and that, along with my ignorant understanding of tax laws and bureaucratic jargon, makes me very uneasy.
But the Cows always offer insight… and I totally appreciate it!
Jason
greydogfilms.com
-
My company is an LLC filed as an S-Corp. and has an EIN/Tax ID. Because of these “components” I don’t need 1099s from my clients. But…last year I hired a subcontractor who was a LLC but did not have an EIN/Tax ID. My accountant said I needed to send her a 1099 because of that combo.
Bruce Bennett,
Bennett Marketing & Media Production, LLC – http://www.bmmp.com
Reply to this Discussion! Login or Sign Up