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Richard, Tax Attorney
Category: Tax
Satisfied Customers: 55132
Experience:  29 years of experience as a tax, real estate, and business attorney.
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I am starting a small property management company and for

Customer Question

Hi I am starting a small property management company and for right now it is just me. I will be an employee for my own company. I want to later add other employees but not at this time. I want to be able to deduct expenses etc. I am not sure what to do a llc or a s corp ?
Submitted: 2 years ago.
Category: Tax
Expert:  Richard replied 2 years ago.
Hi! My name is ***** ***** I look forward to helping you!
Actually, the best of both worlds is to form your entity as an LLC and then elect for it to be treated for tax purposes as an S Corp. Both the LLC and the S Corp are limited liability entities meaning your personal assets would not be at risk for the debts and liabilities of your entity. And, both are "flow-through" entities for tax purposes...meaning that the entity does not pay taxes; rather the operations of the entities flow through to your own personal tax return. The LLC is more flexible as it allows for preferential allocations of profits and losses, but if you are a single owner, that probably doesn't make much difference. The LLC also is a bit less cumbersome administratively as your filing requirements. And, unlike an S Corp, the LLC is not required to have formal meetings and keep minutes of those meetings. The biggest issue with the LLC is that as the owner of an LLC, you are considered to be self-employed and must pay the 15.3% self-employment tax contributions towards Medicare and social security. As such, the entire net income of the LLC is subject to this tax. With an S Corp, if you work for the entity, you must pay yourself 'reasonable compensation.' Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as 'wages.' Unlike an LLC, where you are subject to employment tax on the entire net income of the business, only the wages of the S-Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a 'distribution' which is either taxed at a lower rate or not at all depending upon the particular facts. BUT, as shareholder, you must receive reasonable compensation. If you get greedy by paying yourself a lower salary with the resulting higher distributions, you risk the reclassifying your distributions as wages. Thus, as I mentioned above, the best solution is to form an LLC and then elect for it to be treated as an S Corp for tax purposes; this results in the best of both worlds...the flexibility of an LLC and the advantageous self-employment tax treatment of an S Corp. :)
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