Author Topic: S Corp Tax Election: LLC vs Corporation  (Read 636 times)

Richie Poor

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S Corp Tax Election: LLC vs Corporation
« on: August 30, 2017, 04:26:25 PM »
I finally made the decision to go the S corp route for my consulting business (operated as sole proprietor before). From reading previous threads I see there are a lot of forum members that have made the switch. So I just met with a new CPA who agreed it would be a benefit to me, answered my questions on the details, and offered to set it up for a fee (no problem with that). But the weird thing was I was already convinced I would be creating an LLC and then electing S corp tax status. He said "No, you want to incorporate and then elect S corp" but never gave me a clear explanation of what the difference would be for me and I was running out of time for my lunch hour and didn't press the issue. I told him I would think about it and get back to him.

I'm in Texas and it looks like it would be $300 to form an LLC and the fee is the same to incorporate. So if you are forming a new business that will elect S corp tax status does it even matter which one you choose? They both seem to have liability protection.

CareCPA

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Re: S Corp Tax Election: LLC vs Corporation
« Reply #1 on: August 30, 2017, 06:43:47 PM »
It may have just been a terminology difference. When you're an LLC, you technically elect to be taxed as a corporation, and then as an S Corp. The IRS has just streamlined it into one form for ease.
Always happy to help with tax or accounting questions - feel free to private message me.

I am a licensed CPA in Pennsylvania. However, any tax advice I give should be considered general information and not used in the avoidance of tax. There is most likely information about your situation that I do not know, and thus you should do your own additional research.

Yes, in case it confuses you, I did change my forum name.

protostache

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Re: S Corp Tax Election: LLC vs Corporation
« Reply #2 on: August 31, 2017, 06:48:58 AM »
I think you should push back on the CPA about what you want. An LLC is going to be easier to administer on the state level because you don't have to do all of the corporate formalities all the time. It'll also be more flexible in the future as far as dropping S-corp if it's no longer advantageous, because you'll drop back to partnership taxation instead of C-corp taxation.

It's basically the same process so I don't know why this CPA would advocate for a state law corporation instead of an LLC.

SeattleCPA

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Re: S Corp Tax Election: LLC vs Corporation
« Reply #3 on: August 31, 2017, 08:02:11 AM »
It's usually a mistake to use a corporation as a platform for the Subchapter S election... For small businesses, an LLC is almost always a better option.

Two big benefits of using an LLC:
1. First, the governance will typically be easier... (though Texas has a close corporation which simplifies stuff I guess...)
2. Your LLC can be treated as a sole proprietorship for 2017 (which is probably what you want at this point to keep costs low)... then as an Subchapter S for 2018 and all future years the Subchapter S election makes sense... You may even be able to (after a five year waiting period) decide to treat the LLC as a sole proprietorship again for those final, wind-down years... which keeps costs low.

BTW, our CPA firm specializes in S corps... we do a couple of hundred 1120S returns... I used to teach the S corporation tax law course in the masters in taxation program at Golden Gate University which is the big graduate tax program for CPAs. I mention this not to angle for the business. I mention it so you have a little more context for my remarks.
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SeattleCPA

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Re: S Corp Tax Election: LLC vs Corporation
« Reply #4 on: August 31, 2017, 08:04:26 AM »
This might help you make more sense of the issue:

http://www.scorporationsexplained.com/llcsexplained-scorporations.htm
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Midwest

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Re: S Corp Tax Election: LLC vs Corporation
« Reply #5 on: August 31, 2017, 08:21:18 AM »
CPA here.  We usually use LLC's and elect S-Corp status if needed.  Easier governance in my state (not Texas).  Ask your attorney for advice.  From a tax perspective, the IRS doesn't care if it's an LLC or a Corp being taxed as an S-Corp.

FWIW - I also don't typically recommend the LLC electing S-status until they hit a hit a minimum income level.  Once you elect S-status, you are now forced to run payroll and prepare a separate return (I'm assuming you are a single member LLC).  The tax savings need to be enough to offset the additional cost for those services.

SeattleCPA

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Re: S Corp Tax Election: LLC vs Corporation
« Reply #6 on: August 31, 2017, 09:37:00 AM »

FWIW - I also don't typically recommend the LLC electing S-status until they hit a hit a minimum income level.  Once you elect S-status, you are now forced to run payroll and prepare a separate return (I'm assuming you are a single member LLC).  The tax savings need to be enough to offset the additional cost for those services.

Totally agree with above... that's a big reason (the other reason is the cost of doing a corporate return) for saying you go with an LLC... you'll sidestep having to file either an 1120 (c corp return) or an 1120S (s corp return) return for first short year... or first few "light income" years.
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Richie Poor

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Re: S Corp Tax Election: LLC vs Corporation
« Reply #7 on: August 31, 2017, 09:58:56 AM »
Thank you everyone for the responses.. SeattleCPA, I had actually learned a lot from your blog prior to making the S corp decision. So thank you for the great resource.

Even though there may not be much difference between the two in Texas I will plan on sticking with the LLC route. There is a chance the wind-down years could be useful as a sole proprietor.

SeattleCPA

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Re: S Corp Tax Election: LLC vs Corporation
« Reply #8 on: August 31, 2017, 02:46:30 PM »
Thank you everyone for the responses.. SeattleCPA, I had actually learned a lot from your blog prior to making the S corp decision. So thank you for the great resource.


You are very welcome. Glad you found it useful.

BTW the page below may give you all the instructional help you need to DIY your entity formation:

https://evergreensmallbusiness.com/all-states-real-estate-investor-llc-formation-kit/forming-a-texas-limited-liability-company/
My blog Evergreen Small Business
My free downloadable ebook: Thirteen Word Retirement Plan