I recently made an LLC.I am the owner and the only one

Dear Customer,

Personally, I prefer C Corporation. It is simple and easy. It has more deductible fringe benefit than S Corporation. The applicable laws require S Corporation be be treated like Schedule C proprietorship. Therefore, the deductions not allowed for proprietorship are also not allowed for S corp. For one example, in C Corporation, the corporation is allowed to pay for medical expenses of the owner. S corporation cannot.

C Corporation has a little more protection. Usually, because S corporation flows to individual tax returns, it is viewed as personal proprietorship with less distinction from its owner.

It you have a business plan for the earning accumulated, you don't have to issue dividends. The corporation to officer is less an issue than in S corporation. Compensation to officer is a focus for IRS audit. Recently, the IRS has made the distribution and debt and S corporation owner's basis a big audit issue. The late filing S Corporation penalty is a horrible penalty.

LLC, no matter filing as S or C Corporation, has percentage ownership. The calculation and change of the percentage ownership still need to follow the State rule and not only the IRS rule.

If a person is going to join you, it is best that you treat the person as W-2 worker as you are, too. Independent contractor does not join the owner. Whether it is S Corporation or C Corporation, the owner officer is supposed to be compensated for his/her services. W-2 is necessary.

However, if you get another professional, the person probably thinks S Corporation is easier because it more popular. If we do the book, tax, etc. correctly, S corporation is not necessarily easier.

A lot of people (tax professionals) will determine to use the C or S status based on whether you will have gain or loss in the first five to 10 years. Whether the owners through K-1 flow through can enjoy the gain or loss is how I will plan, too. If the owners are in the highest tax bracket already, leaving the income in the business (if we expect it to grow in income) makes more sense. The C Corp may be in a lower tax bracket than the individual.

If the owner has much and many assets in addition to this company, we absolutely don't want to do S corporation. Anything happens to this corporation can easily be linked to him if all these assets and businesses are on his personal tax return.

I would say that leave S corporation only to higher end of sole proprietorship or a corporation with many, many passive non operational owners.

Please feel free to follow up.

Regards,

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP