The Elysian Fields

S Corp vs. LLC, LLC vs. S Corp. What do you want your business to be today?

An ever popular blog topic, let me tell you.

To be an LLC and have certain things you can do, and certain things that get done to you, such as, by default, having all business income slapped on your 1040 and hit with an additional 15% self employment tax to cover social security and medicare; technically, it stops at $94somethingk, and you're left with the 2.9% medicare for everything over and above that magic number.

To be an S Corp, you divvy up the profits amongst shareholders, and slap *that* on your WD40. I mean 1040. Plus, you have to file an 1120S. But you don't get hit with the self employment tax *unless* you 1) do work for the company; and 2) don't draw a big enough W2able salary. If you don't pay yourself a reasonable wage, you essentially wind up getting hit with the a self employment tax on the entire bit, just like with an LLC.

Now, in most of the ever helpful advice found out there on teh intarwebs, you learn that an LLC is greatly simplified over an S Corp. After all, the S Corp has all the strict rules a corporation does, and a board that selects directors to run things, and so on and so forth. Then again, you have some who say an S Corp is easier - and cheaper - to set up than an LLC.

Here's the great part...

There's no such business entity as an S Corp. And there's no such tax entity as an LLC.

So many miss this distinction. I missed it, and I was looking for it. I had Form 8832 in my hot little hands (okay, in a folder on the computer...) and it showed me that, as an LLC, I could decide how I wanted my taxes done: as a sole proprietor, as a partnership, or as a corporation. Hey, cool. But the CPA really wants me to be an S Corp for all the savings expected in taxes.

To add to some confusion, a C Corp, aka just-plain-corporation, gets taxed twice: first, the corp itself pays income taxes; then, when it pays out dividends, the shareholders pay income tax on that same money.

So, as I'm verboten on the whole partnership thing, on account of being the One and Only, that leaves me with the option, via 8832, of deciding I want the IRS - and PA Dept of Revenue - to look upon me as Me or Inc.

Here's that gap in knowledge and understanding, as seen in most advice.

Whichever I decided upon, I would still be an LLC. I wouldn't, as far as all the nasty Corp overhead goes, be Incorporated. Because, well, I wouldn't be. That's a business entity, set by state statute, and my business entity is the same. It's just that the LLC can be taxed as different things.

So my CPA, he wants me to ignore 8832 and go with the 2553, which would make me an S Corp.

See, that's where my confusion comes in. Would form 2553 force me to go through the steps to change my legal business entity to a corporation in addition to using Subchapter S as far as the IRS can see?

It doesn't help that 90% of the advice out there is caged in terms of, as I mentioned, S Corp vs. LLC. It doesn't help that, outside of a few explanations and a few convoluted instructions, people use "S Corp" to mean "a corporation business entity taxed under Subchapter S" and "a business entity taxed under Subchapter S", and what that second one expands to, in reality, is "a corporation or limited liability company or other business entity taxed as a corporation under Subchapter S."

It's like being given some cake to have and to hold, in sickness and in health, forever and always, that you can look at in your hands and digest in your belly at the exact same time.

So I will be able to be an LLC, continue with members and not shareholders, have all kinds of flexible reporting that is not required (which my lawyer says I pretty much need to do anyway, just in case I should need his services and expect to win the case that I am an LLC and the Limited Liability thing should be happening), and, on top of all that, I'll be able to have taxes done as if I was an S Corporation, which means I don't get double taxed, and I don't get stiffed with excessive self-employment taxes provided I pay myself a decent salary, and, most importantly to me, I can pay myself a salary - put myself on the payroll, get withholding and W2s and all that stuff.

I think I finally figured it out. It's a piece of cake.

~"This was a dead end a minute ago..."

"No, that's the dead end behind you!"

~"It keeps changing! What am I supposed to do?"

"Well, the only way out of here is to try one of these doors. One of them leads to the castle at the center of the Labyrinth. The other one leads to-"

"Boo-boo-ba-boom..."

"-certain death!"

"Whooo..."

~"Well which one is which?"

"Umm..."

"...ahh... We can't tell you."

~"Why not?"

"Err..."

"We don't know. But they do..."

~"Oh, well I'll ask them."

"Um... no... you can't ask us. You can only ask one of us."

"It's in the rules. And I should warn you that one of us always tell the truth and one of us always lies. He always lies."

"I do not. I tell the truth."

"Ooh what a lie."

~"Okay, answer yes or no... Would he tell me that this door leads to the castle?"

"Um... Yes."

~"Then the other door leads to the castle and this door leads to certain death."

"How do you know? He could be telling the truth."

~"But then you wouldn't be. So if you told me that he would say yes, then I know the answer would be no."

"But I could be telling the truth."

~"But then he would be lying... So if you told me the answer was yes, the answer would still be no."

"Wait a minute... Is that right?"

"I don't know. I've never understood it."

~"No, it's right. I could never do it before. I think I'm getting smarter. This is a piece of cake."

...falls down a trap door