Finance Questions? Ask a Financial Expert for Answers ASAP
Thank you for your question. My name is XXXXX XXXXX I will be happy to help you today
When you look at starting a business, people are looking to have liability protection and tax optimization
With a small business, an S Corp would be a good option for you. The reason being is that it will help you minimize any self employment taxes that you would have if you were a partnership or LLC
Your daughter would be a shareholder in the S Corp, and she would also need to file her own taxes, as she will have income
The same is true if you chose to be a partnership or LLC.
Your daughter is going to have income.
If you own part of the S Corp, part of the earnings would go to your tax return, and the other portion would go to her tax return
Ok so if an S Corp is formed do we then form an LLC in order to have the limited liability protection and do we then make the LLC the beneficiary of the S Corp.
Well, an S Corp is a corporation. You would incorporate and then file form 2553 and elect to be treated as an S Corp
Either that, or you can open an LLC and file the same form and elect to be taxed like an S Corp
Either way, the S Corp gives you liability protection
Ok thanks. XXXXX need to sit with an attorney and/or a cpa to find out which way (S Corp or an LLC taxed as an S Corp) would benefit us?
Honestly, both would protect you the same. But, I would go with the LLC because of the ease of formation and you don't have the same formalities as you do with a Corp. It's easier to maintain
With a corporation you MUST do certain things, like have annual meetings, etc or else you can "pierce the corporate veil"
It's harder to do that with an LLC ... it's much more flexible. Most small businesses are LLCs for that reason
But, a sit-down with an attorney is always a good thing if you have the ability to do that.
Ahhhh yes I read something about the "pierce the corporate veil" issue online. Ok thank you for your advice.
How the S Corp reduces your tax is that you will pay yourself a salary based on your work with the business, and that's what FICA taxes are paid on
With a partnership or LLC taxed as a partnership you have to pay self employment taxes on your entire profit
As your daughter will be doing the work, she will get a salary from the business. You would get a small salary for any managerial duties that you do. But, the rest of the profit just has income tax
Do you have further questions about this?
I see. So you do not have to pay taxes on the entire profit with an S Corp?? And self employment taxes is considered a higher tax bracket correct??
NO, you do pay income tax on all the profit. Self employment/FICA taxes are IN ADDITION TO income tax. So, you are essentially taxed twice = once as income, again as self employment
Those taxes go to fund Social Security
The income tax remains the same, no matter what option you choose. However, you will lower your self employment/FICA taxes if you are an S Corp
Ok I have a better understanding now. I don't like the sounds of taxed twice though. I will take everything you have taught me into considertion when choosing. Thank you.
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