My name is Tanya and I'm a newbie in RE Market. I'm planning on setting up an LLC for my wholesaling/flipping/creative financing business. I've read some Guru's books talking about LLC treated as S-Corp. And I'm not quite get the differences between LLC and LLC treated as S-Corp.
Here are my questions:
1. What is(are) the difference(s) between these two?
2. Pros and Cons of both?
3. What are the cost of both?
4. Due to my investing purpose (wholesaling/flipping/creative financing), which one I should go with? LLC or LLC treated as S-Corp?
Your answer will be greatly appreciated!
- Tanya :)
Im an LLC S-Corp election.
The main difference is the way earnings are taxed. With an S-Corp election earnings are passed through to the owner in the form of wages and/or distributions and distributions aren't taxed for FICA and Medicare. With a regular LLC all earnings are passed to you as income and you have to pay tax on the whole amount as far as I understand it.
Applying for a tax ID is free on the IRS web site and so is the S-Corp election. I usually file both at the same time. Your state might have a fee to set up an LLC. Here in FL it was $125 or $175 I think it was - not a crazy amount.
As far as what's best for you, I can't answer that one. I would really run that by an accountant to see what he or she says is best for your individual situation.
@Phil B. Many thanks for your answer! It's very helpful :) Is there difference between solely owning and partnering up with someone? I mean in the tax purpose.
No, in fact the nice thing about an LLC vs. a corp is that you can distribute earnings to any partner in any way. Let's say you are 50/50 partners with someone. In a corp, distributions need to be distributed evenly 50/50. In an LLC you can give the other partner 20% of the distributions and you take 80% if he doesn't work as much let's say.
You will be each taxed based on how much income you paid yourself. With the S election, since the income passes through personally, if you have another job lets say, the income from the LLC is added to your personal income from wherever else and that could push you up a tax bracket or two...
@Phil B. Thanks for the great info! I will have to talk to my accountant about this to make sure it's the best for my situation. Have a great weekend! :)
Hi Tanya, The LLC as an S corp essentially means the IRS treats your LLC as an S corp. Here are some of the pros and cons of each: https://ct.wolterskluwer.com/resources/guide/s-corporation-vs-llc. It's best to consult an advisor on which is best for you, because with the LLC as S corp, the S corp tax rules still have to be satisfied when running the business. We hope this helps :)
Yikes. Electing S-corps status is just asking to get audited by the IRS if you don't know exactly what you're doing. That having been said, you only really ever need S-corp status if your company's earnings exceed what you would normally pay yourself in wages (a good rule of thumb is not to consider it until you're netting 100k, then go see your accountant.) If you don't get the salary calculation right, you'll be hit with major penalties.
I've had to warn quite a few clients off overzealous accountants' S-corp recommendations. If an accountant recommends you make the election at the outset and he knows that you aren't sure that the revenues will be substantial in the first year, I'd say it's time to find a new accountant. You can always make the election later when it becomes necessary.
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