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Our LLC is considering changing to an S Corp. WE have done

some research to learn what...
Our LLC is considering changing to an S Corp. WE have done some research to learn what the benefits are in doing so but are not really clear if this is a good choice. The very first interest that drew us to this idea was to save money i.e. less taxes for the individual. The fact that with an LLC we were each paying self employment tax (our social security). Members felt heavily burdened by this and as such an S corp was suggested. In an S Corp it appears the business has to pay these taxes (in a way it seems to me you pay for these taxes but now it comes directly through the business and out of your profits).
It is my understanding that as members of an S Corp we also need to pay unemployment but cannot receive benefits. Is this true? As a note our company only operates for 7 months out of the year - we build kit homes and folks are not building in inclement weather months.
Another question that has come up is that the business profits do not need to have social security tax paid on them. Is this true and if so can you enlighten us on what this might mean to us? The same CPA that told us this told us we could have reasonable salaries and take the remaining in profit. Is this true? Of course in this situation a balanced ownership would be ideal? Any light you can share on this is appreciated.
These are the tax/benefit questions. The main initial question is whether we should make this change and as such would like to see what the pros and cons of doing so would be. What does it take to become and maintain an S Corp Versus an LLC? Is filing/record keeping significantly more involved? What would be the advantages to becoming an S Corp? And anything else you can think of to help us understand and make a good choice.
A little about our company - We are registered in Washington State; there are 4 members; we build kit homes; we have one employee; presently the shares are divided with 2 members @ 6%, 1 @ 15% and 1 @ 73%. The percentages may change as the major
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Answered in 18 minutes by:
10/7/2013
Law Educator, Esq.
Category: Business Law
Satisfied Customers: 119,599
Experience: All corporate law, including non-profits and charitable fraternal organizations.
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Thank you for your question and for asking for me. I look forward to working with you to provide you the information you are seeking.

The S Corp is really the older version of the more modern LLC. The rules and laws for both are essentially identical. The LLC can actually elect to be taxed as a corporation, which would give you the same tax scheme as the S Corp for the LLC. Members of an LLC or S Corp could actually receive unemployment benefits if they can prove to the unemployment commission that the reason they are out of work is truly from reasons that are not the fault of the members of the LLC or S-Corp, it is just more work to show that the reason you are not employed and making money is because you have not been able despite due diligence to get work. For unemployment, the benefits are based only on the wages you make from the company, not on profit sharing, so you have to take wages for working from the LLC or S-Corp.

Salaries would have to have social security taxes paid, but profits from the company would not have social security paid. Many people with an LLC or an S-corp would take a salary that would entitle them to the maximum unemployment benefit and then would take the remainder in profits to avoid the additional social security taxes.

Instead of a CPA, you really need to sit with a local business law attorney to examine your business structure to decide perhaps if just taxing your LLC like a corporation would be better than switching to the S-corp, which does not get you much more in any other benefits than the S Corp legally, as I said they are about the same thing for the most part.



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Customer reply replied 4 years ago

Hi Paul,


 


Thank you for your answer. Our understanding of the LLC is that we are not allowed to have "wages" only guaranteed payments. As such these are not wages and need to have self employment tax paid on them fully by the individual. In the S Corp you can become an employee and this changes to the business paying half of the Social Security. Is this not true? Can the LLC set itself up in a manner that the owner/member can become an employee of the business?


 


IN so far as the unemployment. Our business operates about 7-8 months a year. The remainder there is so little possibility of work (we build kit homes and folks are just not building in the winter months) that we shut down for these months other than fielding calls on potential customers. DO you think this is acceptable as "no fault of the owners" and would make us "employees" eligible for benefits?

Thank you for your response.

I do not know who told you the LLC could not pay you wages as employees of the LLC, but they can. The S Corp is the predecessor of the LLC, everything the S Corp can do is the same and the laws are virtually identical.

Of course some CPAs do not quite understand the LLC and it is the same and you would be amazed at how many CPAs advise their clients to take profits not wages to save taxes and then the members get screwed out of unemployment.

I would not suggest consulting any CPA for this type of matter, you need to use a business or corporate law attorney.

Yes, it is possible for the members of the LLC to get unemployment under those circumstances. I believe you need to stay as LLC, pay yourselves as employees for work you do up to at least the maximum pay for maximum unemployment benefits and you can seek to tax the LLC like a corporation as well. Please sit with a local corporate/business attorney to review your set up and not a CPA.
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Customer reply replied 4 years ago

Thank you once again.


 


You mention that we should seek to tax ourselves (under the LLC) like a corporation. Would you please explain this further? How does a corporation tax itself differently? Presently we pay no tax for the business whatsoever.

An LLC can submit a form to the IRS asking to be taxed as a corporation, which means they would pay corporate tax rates and then the members pay taxes on their salary from the corporation. See: IRS Form 8832. So then the business pays the taxes on any profits they make, but your salaries are deducted from the profits of course as are other business expenses.
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Customer reply replied 4 years ago

Presently with our "guaranteed" payments we pay them out like they are wages, every two weeks. IN actuality the are compensation for actual hours spent working. With a salary, isn't this a base pay with out variation or can we do basically the same and pay a bi-monthly "draw" on the "salary" which in reality would be based on hours worked in that time period?

You need to call it salary or wages and pay unemployment if you have any hopes of collecting unemployment in the future, that is the problem. You can pay your wages any way you like, weekly, bi weekly, bi monthly, monthly, it is up to the members.
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Customer reply replied 4 years ago

HI Paul.


 


I have been conversing with a CPA at the same time I have been with you. IN regards XXXXX XXXXX form 8832 you recommended, they said the real form we need to use is 2553 in order to use corporate tax structure for out LLC. Are they missing something or are these two basically the same? Could you help clarify this? From what I have read form 8832 is to from a C Corp.


 


Thank you

Thank you for your response.

This is the problem sometimes with CPA's. Please click on the link above that says Form 8823, that is the IRS website and it specifically tells you step by step what to do and the IRS tells you to file the 8823 as an LLC to be taxed as a corporation. The Form 2553 is not for that and I think you may have misunderstood what the CPA stated. Look at the link I provided to the IRS where I typed in previous response to you Form 8823 and you will see that it is the form to choose to have your LLC taxed like a Corporation, the form 2553 is for an S-corp conversion.

 

 

Law Educator, Esq.
Category: Business Law
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Experience: All corporate law, including non-profits and charitable fraternal organizations.
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