Starting up a new side hustle with partner - LLC what type of election

[MrSal]

A partner and I are starting a new side gig... it involves some selling to consumers so we want to protect ourselves and LLC being such low cost we want to start it up front.

My question is, what type of election? LLC can elect to be treated as S-Corp or Partnership/Sole Prop status ... from what I have been reading it seems LLC being treated as S Corp is the best of both worlds so why would someone would choose differently?

By best of both worlds, I mean, in terms of bureaucracy they are still the same, however the S-Corp election enables to "bypass", in case of profits, some of the Self employment tax ... while the LLC  normal election, that is not the case...

There has to be something else in the equation, why else would anyone choose anything other than LLC being treated as S-Corp? I do see that S Corp election we need to pay a reasonable salary ... however, does it need to have salary even when we are not turning a profit yet? We do not intend to pay ourselves, until we have enough cashflow/profits coming in.

I know whatever is said here is not advice etc etc... I should seek a CPA or tax lawyer but I just want to understand and have a grasp of things :) and lot of people here are super smart too!

Thanks

[SeattleCPA]

A multiple member LLC will by default be treated as a partnership and you can elect to have it treated as either a C corp or an S corp.

If you're just starting up, probably the default "partnership" option is best.

More info here: https://evergreensmallbusiness.com/should-you-use-an-s-corporation-for-a-sideline-or-part-time-business/

The reason? There are incremental costs to you electing to run the business as an S corporation: payroll, FUTA taxes, a slight loss of flexibility, lower Sec. 199A deductions if you're a part-time venture, etc.

BTW, in our CPA firm, we specialize in S corporations. So we love them. But they're for when you can save lots of payroll taxes--which won't be the case for you guys at the very start.

P.S. If you start making more money in the business than you would need to pay out in reasonable wages, you do want to make the S election probably:

More info here: https://evergreensmallbusiness.com/million-dollar-s-corporation-mistake/

[SC93]

Now that you got a qualified answer to your question, I didn't want to hijack the thread before you got an answer...... the odds of you being the 2 people that make it in a partnership are slim to none just so you know. But let me add this as far as a partner goes..... I've had a business partner since 1989 and we work perfect together. But we work perfect together because what we do together has nothing to do with our bread & butter. We understood from day 1 it was all for fun. We've had so many businesses together I can't count them all. Some failed, some were money makers but the key to it all was that it was for fun. And, when 1 of us takes charge in a business, the other follows and neither of us question the other. Late last year we embarked on a 30 year business plan together but most people don't do business like us, so most people fail at partnerships. I've tried the same thing with numerous others and they have made it fail. So good luck..... their are lots of sunken partnerSHIPS at the bottom of the ocean.

[MrSal]

Now that you got a qualified answer to your question, I didn't want to hijack the thread before you got an answer...... the odds of you being the 2 people that make it in a partnership are slim to none just so you know. But let me add this as far as a partner goes..... I've had a business partner since 1989 and we work perfect together. But we work perfect together because what we do together has nothing to do with our bread & butter. We understood from day 1 it was all for fun. We've had so many businesses together I can't count them all. Some failed, some were money makers but the key to it all was that it was for fun. And, when 1 of us takes charge in a business, the other follows and neither of us question the other. Late last year we embarked on a 30 year business plan together but most people don't do business like us, so most people fail at partnerships. I've tried the same thing with numerous others and they have made it fail. So good luck..... their are lots of sunken partnerSHIPS at the bottom of the ocean.

I agree with this.

However we fall in that boat... We're doing it for fun and not really to be our bread and butter... More like beer money :D

[MrSal]

A multiple member LLC will by default be treated as a partnership and you can elect to have it treated as either a C corp or an S corp.

If you're just starting up, probably the default "partnership" option is best.

More info here: https://evergreensmallbusiness.com/should-you-use-an-s-corporation-for-a-sideline-or-part-time-business/

The reason? There are incremental costs to you electing to run the business as an S corporation: payroll, FUTA taxes, a slight loss of flexibility, lower Sec. 199A deductions if you're a part-time venture, etc.

BTW, in our CPA firm, we specialize in S corporations. So we love them. But they're for when you can save lots of payroll taxes--which won't be the case for you guys at the very start.

P.S. If you start making more money in the business than you would need to pay out in reasonable wages, you do want to make the S election probably:

More info here: https://evergreensmallbusiness.com/million-dollar-s-corporation-mistake/

Thanks for your answer.

Would this rationale be the same for a single member llc? S Corp vs sole prop, when starting out?

[SeattleCPA]

Yes. A SMLLC is actually a pretty lean and low-cost format to use to run your gig.

BTW, it'll make sense once you start making something well in excess of what can be a "fair" wage to elect to treat yourself as an S corporation.

Here's a list BTW of average S corporation salaries from 2013 IRS data: http://www.scorporationsexplained.com/average-s-corporation-salaries.htm

Tip: These salaries pretty aggressively low, I think. But they show you what you'd want your profit to be way over because electing S status.