Have Tax Questions? Ask a Tax Expert for Answers ASAP
Good morning and thank you for using Just Answer. There are quite a bit of differences. First of all, if there is only one member of the LLC, the entity is treated as a sole proprietorship by the IRS. This means that if it doesn't show a profit after three years, it could be deemed a hobby. Next, an LLC with two or more members can elect to be taxed as a partnership, regular corporation or subchapter S-corporation. This is significant because regular corporations are subject to income tax where the income and expenses flow to the members in the other entities.
Thinking about an LLC with two members ( me and my wife for example - both foreigners), wich difference it make to elect to be taxed as a partnership, regular corporation ou subchapter S-corporation?
If the entity will generate income, I suggest electing to be taxed as a corporation and then electing to be taxed as an S-Corporation. Here's why: all of the income from a partnership is subject to self-employment tax (Social Security and Medicare) in addition to income tax. This would be an additional 12% or so this year and may revert back to the 15% that's been in place. The income tax would be your individual tax rate. As a regular corporation, you'll pay corporate income tax plus individual tax on the funds you take out of the business outside of salary.
The S-Corp does not pay corporate income tax, and distributions are not taxed as dividends. The net income is taxed at your individual tax rate. Like with regular corporations, you are required to take a salary in line with what others in the field are receiving. Your wages are subject to employment taxes, but this is better than the entire amount of income. Retirement plans such as SEPs and SARSEPs can change this picture and make other choices more favorable.