Discussion:LLC vs. S-Corp - What are the advantages of each?
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Discussion Forum Index --> Consumer Questions --> LLC vs. S-Corp - What are the advantages of each?
| 19 February 2006 | |
| iam a sole propertior and need to change to either a llc or an s- corp. what are the advantages and dis advantiges of each. just a short comparasion is o.k. | |
| 19 February 2006 | |
| Main diff. is that you can pay yourself a salary (and deduct payroll taxes) if you are an S-corp. You can't be an employee of your own LLC. Also, a single member LLC is a disreqarded entity for tax purposes, so you will still report on your schedule C like a sole proprietor. | |
| 20 February 2006 | |
| Jimstax: I would recommend that you meet with a local accountant to discuss all the pros and cons of each business entity. I know you want to keep it short, but there are a number of issues involved. An entire chapter can be written on the subject, and there is no one-size-fits-all best entity. | |
| 6 March 2006 | |
| I would go with Sch. C (LLC) to keep things really simple. LLC laws vary from state to state, so check with your local accountant. | |
| 6 March 2006 | |
| Let's go to the heart of the issue. You say you need to change...so why? If it's merely for risk control (if that even will work, but that's another topic), then keep the LLC/Sch. C simplicity. If your income has hit higher levels and you want to legally dodge some SS taxes, then the S Corp will be the way to go, with the aggravations of payroll tax filings, separate corp. tax return, etc. The advantages between the two matter more where there are two + partners.. | |
- The following series of questions from non-tax-pros, and the related answers, has been moved from a Tax Forum discussion on a similar topic.
| 22 October 2007 | |
| Guys,
This is an excellent forum I ran into by sheer luck. I have a question or two regarding business formation - LLC vs S corp for a home health agency in Texas, if some one (or all of you) can help me with. I am starting my home health agency in texas. I have talked to my accountant who is advising me for an S corp. My lawyer on the other hand has advised me for an LLC. I am planning limited members (or stock holders) for ownership. The agency will provide various therapy services - physical, occupational and speech therapy, and nursing services. The biggest competitor is formed as an LP, while all other small agencies are either S or LLC. The therapists I will hire will have their own liability insurance. The main issues are SE tax, and limitation of classes of stock for an S corp. I understand the basics of both structures, but need your technical advice, and will highly appreciate your responses. | |
| 22 October 2007 | |
| LLC is simply a vehicle for a taxable entity as IRS does not recognize an LLC as any specific taxable entity. If you have a multiple member LLC, then you either have a partnership or corporation and yes, an S corp would be preferable over a C corp as it is a service business. So your question should be: should I be an LLC taxed as a partnership or as a Corporation?
SE Taxes come into play with a partnership if you are actively engaged and you are then self employed for tax purposes.... | |
| 22 October 2007 | |
| Thank you Sandy for such a quick response!!...but then with an S corp, I would be restricted to only one class of shares, correct? How would one manage different class of stocks with an S corp and also different distribution to share holders? I plan to profit share 25-35 % of profit back to the employees keeping remainder for growth. Is there anything else I should keep in mind as I decide the structure? | |
| 22 October 2007 | |
| Do you want a BMW, or a Buick? A Buick costs a lot less when you take it to the shop (and usually does not have to be fine-tuned). I'd get the lawyer on board and try to make it work as an S. Corp. if I could. I won't get into the therapists having their own liability insurance, and how that probably should not make you sleep too well; independent contractor status and all that stuff, but that might be another set of matters you want to fully explore with your lawyer. Of course, they say BMW's don't require the fussing they used to require. Others here may have a different view. | |
| October 22, 2007 | |
| Take a look at the Choice of Entity article on the site here, which may help clarify things. Unless state law comes into play, I'd say that if all members/SH's are putting money in in keeping with their respective ownership %, then go with the S corp. Much easier to handle, esp. when folks come in and go out. If the money is different, i.e. some are working in the biz, some are investing, etc, then the LLC is your only realistic option. | |
| 22 October 2007 | |
| Yes, you would be restricted to one class of stock. You can't have unequal distributions but you will have the same problem with a partnership. If you want to make unequal distributions then you will need a C corp (not a good idea mind you) so you can have varying classes of stock.... | |
| 22 October 2007 | |
| I need to add that, personally, I don't like that beast known as the LLC operating as an S. Corp. It's doable, that's all I will say. I'd go with a straight S. Corp. | |
| 22 October 2007 | |
| For the starter, I will take the Buick and keep my costs low. The advice is genuine and I appreciate your responses.
That said, Sandy, as I understand from my research, one can do a special allocation under an LLC for different distributions, which is not available from an S corp. At this point my primary focus will be implications of having therapists their own liability insurance and if I can/cannot do it to benefit us all involved. I will have people in the business with various types of ownership - investment, business knowledge, and business development. | |
Death&Taxes (talk|edits) said: | 22 October 2007 |
| Didn't we have people complaining about Texas taxing LLCs? Or is that my age catching up with me? Help, where's Tex and our other Lone Star professionals? | |
| 22 October 2007 | |
| The LLC has the bells and whistles. This will cost more upfront, it will also cost more in professional fees to run it, and it will not be a breeze to explain it to your potential partners/investors. It does offer great flexibility as you seem to desire. I would take a guess that the other one you know about is an LLP, and not an LP (perhaps it is an LP, it's possible). At one time in your state, professionals might have been required to use the LLP form. I'm sure your lawyer is on top of these type matters. P.S. sounds like you have some experience, but remember, you will still have the LLC itself that should be evaluated for various types of insurance coverage (don't forget the LLC checking account, receivables, or investments for instance) even though I understand you won't have much in the way of capital equipment or office furniture; and don't forget P&C insurance. It's wise to know the exact limits of those policies. | |
| 23 October 2007 | |
| Texas used to tax LLCs as C corporations, but partnerships (including limited partnerships, and LLCs taxed as partnerships) were not subject to an entity level tax -- and Texas has no individual income tax, so there was no flowthrough to individual owners. Under the new "margin tax," Texas still treats LLCs as if they were C corps, but also taxes other limited liability entities the same way. Only general partnerships of individuals, sole proprietorships, and certain family limited partnerships are exempt from the franchise tax for returns due in 2008 (based on 2007 activity). | |
| 23 October 2007 | |
| Crow,
the one I know is setup as an LP, and as Katie mentioned, that may be because how LLCs are treated by default for tax purposes. I think I am comfortable now with S corp. Yes, LLC will be easier to run, but with me and my wife as the sole stock holders, an S corp will not be any different (except for a few more forms formally). Katie, do you know what is the franchise tax for family LPs in texas? How would I find it? I would be interested in knowing what is the tax benefit my competitor gets going into the business so that I can offset it somehow thru creative management and strategy on my part. | |
| 24 October 2007 | |
| The tax magazine publish by cch has an article about LLC being tax as a Scrop. It shows one the advanage is the LLC/Scorp can have a non-voting stock w/o its S status being terminate. | |
| 24 October 2007 | |
| Hm. Well, I can't tell you where I got the exemption for "family limited partnership." Maybe it was in an early version of the bill. At any rate, I can't find it in the law now. As a limited partership, a FLP would be subject to the franchise tax as if it were a corporation, unless it qualifies as a "passive" entity as defined in the Texas law. To be exempt as a passive entity, at least 90% of its income must be passive in nature (interest, dividends, capital gains/losses on real estate, securities, or commodities traded on an exchange, or royalties, bonuses or delay rental income from mineral properties or income from other nonoperating mineral properties (this last saves some of the limited partnerships in the oil and gas industry from the franchise tax), and not more than 10% of its income must arise from an active trade or business. If your FLP meets that definition (Tex. Tax Code Ann. ยง171.0003(a)), it would be exempt from the franchise tax. | |
| 2 November 2007 | |
| Any thoughts on this: I am a military dentist, but moonlight part-time as a dentist in Maryland. Is there any benefit to an LLC for my outside income? | |
| November 2, 2007 | |
| Of course. You can perhaps limit some SE tax by splitting up the membership interest. An S corp can do the same thing. Note that in the LLC, you'd have to have another member. Consult a good biz accountant and go from there. | |
| 2 November 2007 | |
| If it's just you, you can also consider a Single Member LLC. This will at least get you some contractual protection (if you sign an office lease, or agreements etc). Do not depend on the LLC in any form, or any form of Corp. for tort (i.e. malpractice) protection! Make sure you have malpractice coverage. If you think the side income might become substantial, then consider an S. Corp. with you as only shareholder (this would likely be more trouble than it's worth). I strongly agree with JR1 that you seek professional advice; perhaps assistance from a trustworthy accountant, preparer or business atty. | |
TheTinCook (talk|edits) said: | 2 November 2007 |
| I also suggest seeking an attorny as well as an acountant. Many states have limits on what kind of entity a professional can form. Some of those enitites only offer protection against vicarious liability. This is the kind of stuff an attorney would know. | |
| 24 March 2008 | |
| If I want to check if the state of California allows for LLC formation for a dental office, can anyone provide any link/info on this. | |
TheTinCook (talk|edits) said: | 24 March 2008 |
| www.sos.ca.gov
Trust me, you can't form a LLC for the practice of medicine in CA. Your best bet would be a LLP. | |
| 16 September 2008 | |
| I am a dentist in Texas. I work as an independent contractor for an office. I would like to form an LLC for tax purposes. However, the IRS website says that a Single Member LLC (SMLLC) is taxed as a sole proprietor. What are the tax advantages of forming an LLC, then?
Also, should I form an LLC or a PLLC? | |
| 16 September 2008 | |
| There is no tax advantage to a single-member LLC; the purpose of forming the entity is to protect the owner's other assets from the claims of creditors of the business. Generally, state laws require professional service providers (like dentists) to be personally responsible for their own acts and omissions in the conduct of their practice. As a result, an LLC may not provide any liability protection to a professional service provider, and in many states such providers are not allowed to operate in LLC form. The PLLC (Professional LLC) generally protects a member of a multi-member LLC from liability for the acts and omissions of the other members, but does not protect a member from liability for his or her own acts and omissions.
You should also be aware that Texas taxes LLCs as if they were Subchapter C corporations. If you were to form a single-member LLC for your dental practice, it would be subject to the Texas franchise tax on its gross margin, just as if it were a corporation. Even if Texas law allows it, an LLC is not a good choice of entity in Texas. | |
ReadMyLips (talk|edits) said: | 16 September 2008 |
| I'm not sure if dentists can operate as an LLC in TX; I'm in CA and they can't. As a sole owner, you would have to incorporate if you didn't want to operate as a sole proprietor; you could make an S election.
Even though SMLLC's file a Schedule C for federal tax purposes, they are still an LLC for legal purposes, so the advantage is the liability protection. | |
| September 16, 2008 | |
| Just because something is or isn't done in CA, don't think it applies to the rest of us. Most states don't prohibit LLC's for pros. | |
ReadMyLips (talk|edits) said: | 16 September 2008 |
| A lot of states don't allow LLCs for professionals; my point is you just need to check with your individual state. | |
| 17 September 2008 | |
| In Texas, professional practices may be organized as "professional limited liability companies." See Texas Stats., Business Organizations Code, Title 3 (Limited Liability Companies) and Title 7 (Professional Entities). | |
