CPA's often recommend LLC as better than SCorp. I understand how that is the case for personal service businesses, but with the $200 annual filing for LLC in NC and the $25 annual filing in NC for SCorp, I can't see that for anything other than personal service businesses. Opinions?
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Firstly the choice is not between LLC or S-Corp. They are two completely different things. One is a legal structure for the business, the other is how that business is taxed.
As a business you have various choices how the business can be legally structured. What is best for each business will depend on how many owners there are, future plans for the business and how much liability risk the owners what to take. An LLC is one form of legal structure that can be used. Has the advantage of limiting the liability of the owners, usually a more flexible structure than a corporation and other advantages such as charging order protection.
Once you have chosen your legal structure then you can decide how it is taxed. S-Corp is one way the business can be taxed. Which way the business should be taxed will depend on the legal structure, how many owners there are, expected profitability and future plans.
Being taxed as an S-Corp may be a good idea even if you have to pay annual fees to your State. You have to run the numbers and see if the tax savings exceed the extra admin costs of being taxed as an S-Corp. -
Please don't advice your client which structure is better based on the filing fee of a state?
I don't advice my clients which structure to setup without an attorney involved. The risks of a wrong choice are rather high. I will work with their attorney to discuss the tax ramifications but at the end it will be the attorney drafting the legal documents and setting up the structure and filing with the authorities. I am there to help with the tax filing, bookkeeping, payroll.
Several times I have been asked to do all that so that they can save money using Legal Zoom and I have refused.Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDRComment
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I thought it would be more to consider than just flippantly say LLC is better, thanks! The Limited liability is the same between corp and LLC, right?Comment
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If the LLC is going to be treated as a disregarded entity, then LLC is probably beter even with the $200 annual report fee. But if the LLC intends to be taxed as a corp (S or C), then it may as well organize as a corp at the outset.Originally posted by Super Mom View Post
Incidentallly, I think it's only a matter of time before NC raises the minimum Franchise Tax to a level at or above the $200 for annual reports for LLC's. So the current marginal difference will eventually go away. I believe the initial setting of the $200 LLC Annual Report fee was a signal that they are moving in that direction. They just haven't taken the next step yet.Last edited by JohnH; 11-25-2013, 10:42 AM."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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Thanks John!Comment
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No
No - in addition to "liability" - there are more things that a Corporation must do (bylaws, board of directors, annual meetings etc) that an LLC does NOT have to do! Unfortunately TTB "Business Entity Comparison Chart" (pg 5-6 5-7) is not very helpful?Originally posted by Super Mom View Post
YOU could incur liability for "advising" a choice of entity?Comment
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I just want to be sure you understand that an LLC can elect to be taxed as an S Corp (Single Member or Multi Member LLC). So you do not have to be a corporation to elect S Status for taxes.Comment
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I have a friend that owns several businesses. A high-end business lawyer told him something interesting. I have NO IDEA if it's true or not, but this is what he was told (at least in Minnesota):
If a person is a single member of several LLC's and ONE LLC is sued or whatever, they CAN go after the assets in the OTHER LLC's.
If a person is a single shareholder of several Corporations and ONE Corporation is sued or whatever, they can NOT go after the assets in the other Corporations.
Again, I have no idea if that is true or not, but that what the high-end business lawyer told my friend.Comment
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I think the lawyer was probably referencing the fact that there is a huge body of settled law regarding corporations which goes all the way back to the English Common Law. Relatively speaking, LLC's are still fairly new and much case law has yet to be decided. That's what a lawyer told me about 10-12 years ago. He said an LLC is OK if you're operating as a single disregarded entity and not operating across state lines. (The "across state llines" issue is important because some states don't even recognize single-member LLC's).
But if you're going to operate across state lines, where the LLC rules are still in flux, or if you're going to walk and talk like a corporation for tax ppurposes, why not just go ahead and be one? No sense taking a chance being a trail blazer if somebody sues your LLC and some lawyer decides to make a name for himself with some novel argument about LLC's. Made a lot of sense to me then - still does today.Last edited by JohnH; 11-25-2013, 09:18 PM."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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When asked I tell the client the difference between LLC and INC, the best route for tax purposes, and if they want less paperwork then they can do LLC but if they are going to be taxed as an S-Corp why not just INC. Either way they need to consult a lawyer on liability issues. I then throw in about he corporate veil. Majority of the time the client has already went and LLC or INC the business. I then find out at tax time.
I recently went through this with a client in a speciality construction field. He said all the other subcontractors for this large company was S-Corps and they did not pay as much in taxes. I had to explain all the above and add in they may not be paying themselves a payroll. After doing the numbers, the tax savings he would get from becoming a S-Corp would be ate up by fees for tax return prep, payroll prep, futa, suta, and yearly renewals. He decided to forgo the S-Corp for now.Comment
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I was told different from an AZ attorney.
I know an attorney here in AZ that owns residential rentals and each one is its own LLC with 2 members (husband and wife). Rent checks are made payable to the LLC. The attorney told me that if the tenant at one rental depleted all his insurance liability, the tenant could NOT go after his other rentals.Originally posted by TaxGuyBill View PostComment
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CPA's in AZ are BIG on S-Corps
Maybe in your state but here in AZ, CPA's push S-Corp's. Mostly so they can obtain the accounting fees in addition to the tax prep fees. I have acquired quite a few of these business clients over years. Most of them should have never elected S-Corp status and nearly most of them still don't know how an S-Corp works.Originally posted by Super Mom View PostComment
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