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ABC Accounting Group
ABC Accounting Group, Financial Advisor
Category: Finance
Satisfied Customers: 708
Experience:  Accounting Manager
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I want to incorporate my business this year either to LLC, S

Customer Question

I want to incorporate my business this year either to LLC, S corp or C corporation, because now my families assets are growing and to protect us personally from losing everything in the event of a lawsuit. Currently, I have a business which is a 50/50 partnership with my husband and we claim about $16,000 on our business taxes per year after we've taken all of our deductions, and I write off my mileage on my personal taxes. (*I have many of conversation if I should do that or not, but we started about 3 years ago and have continued to do so). I drive about 25,000 to 30,000 miles per year and it saves us on owing income taxes by using miles instead of gas, maintenance receipts, etc. There will not be a lot of loss with our business, maybe under $20,000 we actually pay taxes on yearly. We do not have any employees only 2 part-time 1099 contractors. Which do you advise would be the best type of business to set up (llc, s or c corporation) and why?
Submitted: 8 months ago.
Category: Finance
Expert:  ABC Accounting Group replied 8 months ago.

Hi. Great Question.

C-Corp would be a lot of paperwork and the protection would be the same as an S-Corp or an LLC.

An LLC is a limited liability company and does provide the liability protection - it is not a corporation, though. You can still fill out your partnership return.

S-Corp has the same limited liability, but each of you is considered a shareholder, vs. a member in an llc.

Here is some pros/cons:

LLC Pros:

  1. It is easy to set up and not too costly (around $200)
  2. The red tape involved in forming an LLC isn't as stringent as that involved with S corps, which also leads to savings on accountant and attorney fees, among others.

S Corp Pros:

  1. The key advantage of an S corp is that it offers tax benefits when it comes to excess profits, known as distributions. The S corp pays its employees a "reasonable" salary, which means it should be tied to industry norms, while also deducting payroll expenses like federal taxes and FICA. Then, any remaining profits from the company can be distributed to the owners as dividends, which are taxed at a lower rate than income.

S Corp Cons:

  1. S corps have more strict guidelines than LLCs. Per the tax code, Eka says, you must meet the following standards to create an S corp:
    • Must be a U.S. citizen or resident.
    • Cannot have more than 100 shareholders (a spouse is considered a separate shareholder for the purpose of this rule).
    • Corporation can only have one class of stock.
    • Profits and losses must be distributed to the shareholders in proportion to the shareholder's interest. For example, you can't have disproportionate distributions of dividends or losses. If a shareholder owns 10 percent of the S corp, he or she must receive 10 percent of the profits or losses.
  2. It costs more to form an S corp.
  3. Shareholders must adhere to the requirements at all times. If they don't, they risk disallowing the S corp election, and the corporation would be treated as a C corp with its corresponding restrictions.
  4. Passive income limitation: You can't have more than 25 percent of gross receipts from passive activities, such as real estate investment.
  5. There can be additional state taxes for S corps.
  6. Shareholders should pay attention to paying themselves a "reasonable" salary for the work they perform for the S corp, since the IRS is increasingly scrutinizing S corps for this.
Expert:  ABC Accounting Group replied 8 months ago.

Let me know if you have any questions. Thank you.

Customer: replied 8 months ago.
Will I still get a K-1 with an LLC and do I take my mileage through the LLC or through my K-1 on my personal taxes?
Expert:  ABC Accounting Group replied 8 months ago.

It would go directly to the 1065 return, included on a K-1.