LLC - Convert or tax as S-corp

[Hoosier]

Got a client that was a multi-member LLC (Form 1065) until the second partner left at the end of 2011. In 2012 filed and for 2013 will file Schedule C as a single-member LLC. Want to convert this client to an S-corp for 2014. Would it be best to simply convert or is it possible to be a single-member LLC and be taxed as an s-corp? If so, what are the pros and cons? What steps must be taken? Thoughts or ideas?

[DaveinTexas]

Beating a dead horse a bit more

Hello fellow Taxbooker! The pros and cons of an LLC converting to an S Corp....that would take a few pages to discuss. But I will tell you the process of accomplishing this has been discussed (recently) by myself and John in PA a few times. Simply elect S Status with a Form 2553.

But, you need to think about what you might lose if the client makes this decision. I have a few clients that remain a SMLLC with or without their spouse as a member (Community Property State) and this arrangement works quite well. One spouse can hire the other spouse (as long as there is a genuine employer/employee relationship and work is being done). The employer spouse can use TASC or other 3rd party provider to setup a Health Reimbursement Arrangement for their employee spouse. The HRA will cover the employee spouse as well as the employee's spouse (who is the employer) and the employer spouse can deduct as a business deduction all of the family's medical reimbursements as a Sch C deduction. This saves one particular client I have about $3,000 to $4,000 each year. TASC charges approx. $300 - $350 to administer the plan which is tax deductible and it allows the client to fully deduct all of their medical expenses. And if your client is really old (like over 40) then their medical bills may be much higher. That last line was a joke!! Just checking to see if you are still awake!

You can't do this above arrangement once the LLC elects S Status because the company must be Unincorporated. Also, electing S Status means your client must adhere to all of the IRS rules governing S Corps (no second class of stock), Wages must be paid for services rendered, Forms 941, 940, W2, State reporting must be prepared each quarter. A Separate Business tax return must be filed, as well as a State Corporate Return (if your state requires this). S Corps are also heavily scrutinized by the IRS, especially the ones setup solely to avoid SE taxes (low officer salaries).

I happen to love LLCs taxed as S Corps...but they aren't for everyone and you must be able to inform the client of all of the new rules they must adhere to. The SMLLC is a wonderful thing for some clients, no extra business returns, no payroll reports (unless you hire your spouse), the Health Reimbursement Arrangement (this could save someone a few thousand dollars each year), simplicity of running the business, less rules to adhere to, etc.

My last bit of advice, if you haven't fallen asleep yet, is to seriously consider attending seminars regarding the taxation of S Corps, C Corps, Partnerships. One education company I recommend highly is NCPE, these people are true professionals and travel all over the US so they might be coming to a town near you. I still have much to learn but a lot of what I have learned came from attending their seminars. They teach topics on businesses, individuals, trusts/estates/senior planning, etc. If you don't use these folks for continuing education, I would recommend attending a seminar that your professional associations recommend (AICPA, NAEA, NSA, etc). I welcome you to the board and I hope your tax season is a great one and try not to go crazy!!!

[AZ-Tax]

No Payroll Reports?

I happen to love LLCs taxed as S Corps...but they aren't for everyone and you must be able to inform the client of all of the new rules they must adhere to. The SMLLC is a wonderful thing for some clients, no extra business returns, no payroll reports (unless you hire your spouse), the Health Reimbursement Arrangement (this could save someone a few thousand dollars each year), simplicity of running the business, less rules to adhere to, etc.

Seminars I attended and info I read, if you have a profitable S-Corp, one of the shareholders need to take a reasonable salary which will include filing payroll forms 941 & 940 not to mention state forms if applicable. I recall on this board several years ago I asked for opinions at what net profit level should the shareholder start taking a reasonable salary. The range was $40K to $50K.

[DaveinTexas]

Oopsie

Seminars I attended and info I read, if you have a profitable S-Corp, one of the shareholders need to take a reasonable salary which will include filing payroll forms 941 & 940 not to mention state forms if applicable. I recall on this board several years ago I asked for opinions at what net profit level should the shareholder start taking a reasonable salary. The range was $40K to $50K.

I meant to say SMLLC (Sole Proprietorships) don't have to file payroll reports....if there are no employees. And I really don't think there is a particular dollar amount. The shareholder/officer should do some research on what a reasonable salary should be (which isn't defined).

[John of PA]

You do not have to become a corporation to file as an S Corp, The LLC can elect S Corp status (whether SMLLC or MMLLC) by filing a 2553. The SMLLC would then file form 1120S instead of Sch C and the income would end up on Sch E p2 of the 1040. Hope this helps.