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Do you have an LLC, Inc. S-Corp or...?

by Jana Graff
16 replies
I have NO accounting experience. I'm not a lawyer nor am I seeking legal advice (but I'd appreciate it if I came my way!)

I'm a "wannabe" internet marketer (no BIG money). But I want to be protected, personally, from lawsuits.

I've read LLC's give great tax advantages. Other Say S-Corp. Others say LLC TAXED as s-corp... it's all a foreign language to me.

Anyway, if you can through a tip my way, i'd appreciate it. I'll probably end up at Legal Zoom setting something up next week.

I live in Cali if that matters.
#llc #scorp
  • Profile picture of the author Jason Kanigan
    Speak to an accountant.

    But you're not protected from being sued.

    Errors & Omissions Insurance is something you should look into.
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  • Profile picture of the author sconer
    In your situation, an LLC would be a good idea.

    An LLC gives you protection while still allowing you to file as a sole proprietor, which is very cheap and easy to account for, which makes it great for small companies. If you do your own bookkeeping (get Quickbooks) instead of giving your accountant a box of receipts and sales invoices, you will save a lot of money come tax time.

    The nice benefit of an LLC is that you can also file as an S-Corp. An S-Corp is a lot more work and money as far as accounting, but it allows you to save money on not paying the other half (7%+ I believe) of social security tax on your entire income.

    I would recommend staying away from Legal Zoom or any other company that makes a company for you. You can do it yourself on your state's website without paying a middleman. Make yourself the registered agent.

    Of course, go over this with an accountant and/or lawyer.
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    • Profile picture of the author Jana Graff
      Originally Posted by sconer View Post

      In your situation, an LLC would be a good idea.

      An LLC gives you protection while still allowing you to file as a sole proprietor, which is very cheap and easy to account for, which makes it great for small companies. If you do your own bookkeeping (get Quickbooks) instead of giving your accountant a box of receipts and sales invoices, you will save a lot of money come tax time.

      The nice benefit of an LLC is that you can also file as an S-Corp. An S-Corp is a lot more work and money as far as accounting, but it allows you to save money on not paying the other half (7%+ I believe) of social security tax on your entire income.

      I would recommend staying away from Legal Zoom or any other company that makes a company for you. You can do it yourself on your state's website without paying a middleman. Make yourself the registered agent.

      Of course, go over this with an accountant and/or lawyer.
      If I go LLC and files as an S-Corp do I save that 7%?
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      • Profile picture of the author JC Web
        Originally Posted by Jana Graff View Post

        If I go LLC and files as an S-Corp do I save that 7%?
        This is going to depend on your individual situation, how much profit you make, and how you choose to pay yourself (and anyone else). And like I said previously, your tax implications in California are going to be different than anywhere else - and I mean there can be a very huge difference. People outside of CA don't have a clue how things work here. You really need to get advice from a local professional to address your specific situation.
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      • Profile picture of the author sconer
        Originally Posted by Jana Graff View Post

        If I go LLC and files as an S-Corp do I save that 7%?
        In most places: yes. But it's not something you can just choose to do at the end of the year, you need to setup at the beginning of the year.

        And like the above poster said, your state may be different so you should talk to a local accountant.
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  • Profile picture of the author JC Web
    Make sure you talk to a local professional and not just someone from LegalZoom. This is even more important in California where there is the $800 franchise tax, which can be dealt with differently and have different impact depending on how you file and all the local regulations and local business taxes. California is a whole different animal than any other state. You want a local professional to help you.
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  • Profile picture of the author DIABL0
    Social security tax is 12.4% up to $118,500 and anything above is 0%.

    If you are employed, then you pay 6.2 and your employer pays 6.2.

    If you are self employed, then you pay 12.4 period end of story.

    It sounds like what you guys are saying is that by having an s-corp that then you only pay 6.2, but the s-corp would pay the other 6.2. Which in the end is 12.4.

    I have always used LLC's, so I don't know what advantages or disadvantages there are over an s-corp, but I do know that your not getting out of the full 12.4% SS tax.
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    • Profile picture of the author JC Web
      Originally Posted by DIABL0 View Post

      Social security tax is 12.4% up to $118,500 and anything above is 0%.

      If you are employed, then you pay 6.2 and your employer pays 6.2.

      If you are self employed, then you pay 12.4 period end of story.

      It sounds like what you guys are saying is that by having an s-corp that then you only pay 6.2, but the s-corp would pay the other 6.2. Which in the end is 12.4.

      I have always used LLC's, so I don't know what advantages or disadvantages there are over an s-corp, but I do know that your not getting out of the full 12.4% SS tax.
      It depends how you pay yourself, how much you pay yourself, and how much income your company has whether the s-corp pays that portion of tax on all income or just a portion of it.
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    • Profile picture of the author sconer
      Originally Posted by DIABL0 View Post

      Social security tax is 12.4% up to $118,500 and anything above is 0%.

      If you are employed, then you pay 6.2 and your employer pays 6.2.

      If you are self employed, then you pay 12.4 period end of story.

      It sounds like what you guys are saying is that by having an s-corp that then you only pay 6.2, but the s-corp would pay the other 6.2. Which in the end is 12.4.

      I have always used LLC's, so I don't know what advantages or disadvantages there are over an s-corp, but I do know that your not getting out of the full 12.4% SS tax.
      but I do know that your not getting out of the full 12.4% SS tax.
      It's over 15%, not 12.4%.

      When filing as an S-Corp, you give yourself a reasonable salary, and pay the full tax on that. But the rest you take as a dividend which isn't subject to FICA.
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      • Profile picture of the author DIABL0
        SS is 12.4, medicare is 2.9. 15.3 total. But SS stops at 118.5, so after that your only paying the medicare 2.9 which is unlimited.
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        • Profile picture of the author sconer
          As for the discussion on paying a reasonable salary, the IRS has guidelines on their website to help you determine what reasonable is. I have never seen a percentage or fraction being recommended, however, it might be correct in this situation. Usually it's based on what is comparable in the industry. The problem with internet marketing is that it's not a standard job so there is very little to compare to. Most internet marketers probably gross less than $20K/year and only profit a small portion of that after overhead and expenses. But if you are one of the few people grossing a much higher amount, you need to raise your salary accordingly, so using a percentage would probably be a good idea.

          Originally Posted by DIABL0 View Post

          SS is 12.4, medicare is 2.9. 15.3 total. But SS stops at 118.5, so after that your only paying the medicare 2.9 which is unlimited.
          And why would you want to pay all that tax on the additional money when a reasonable salary for that job is $50K and that's all you have to pay the tax on? The difference between $118K and $50K is $68K. 15% of $68K is $10,000. Let's say it costs you $1,500 more for your accountant to help with the paperwork on the additional filings for an S-corp. You're left with roughly $8,500. How would you like to make $8,500 extra for free?

          Let's say your business makes $300K. Even that 2.9% on the difference between $118K and $300K will get you an additional $5,000 on top of the $8,500.

          FWIW, I am not making this up, it's well known that after you make a certain amount of money it is advantageous to switch to an S-corp for tax purposes. I'm not sure why you are arguing it, just Google it and see tens of thousands of articles in which everyone agrees.
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  • Profile picture of the author jamalexa2819
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    • Profile picture of the author iAmNameLess
      Originally Posted by Jana Graff View Post

      I've read LLC's give great tax advantages.
      You've read wrong. It is pass through taxation and it would be no different than if you were a sole prop. LLC with the subchapter S election probably won't help you unless you're at 50k+ income.

      No idea where you are on an income level...

      Originally Posted by Jana Graff View Post

      If I go LLC and files as an S-Corp do I save that 7%?
      The way an S-Corp is, CPAs typically recommend you paying yourself a "reasonable" salary, at 1/3 of your net profit. That salary gets taxed like any job you would have. The rest of the income, you receive as "distributions" and you don't pay self employment tax on.

      Originally Posted by DIABL0 View Post


      It sounds like what you guys are saying is that by having an s-corp that then you only pay 6.2, but the s-corp would pay the other 6.2. Which in the end is 12.4.

      I have always used LLC's, so I don't know what advantages or disadvantages there are over an s-corp, but I do know that your not getting out of the full 12.4% SS tax.
      By having an S-Corp you pay the full FICA taxes on wages received from your "reasonable salary". The tax advantage is the remaining 2/3rds of your profit that is NOT wage related income but is a distribution of corporate profits. Big advantage over a C-Corp, but the disadvantage vs. a C-Corp is that you can't keep money in the company to avoid taxes, it is still a pass through entity but with tax savings.

      LLC's really don't offer any tax advantage. People form LLC's typically to have some sort of separation from a business and the owner.

      If you're in Cali, and you're wanting to Inc up or form an LLC, you definitely need to speak with an attorney and an accountant. If you're doing internet marketing, I would think you should ask your attorney or accountant about whether it would make sense for you to incorporate or form an LLC in another state, to avoid the franchise tax, among other things. In the end, your income passes through to yourself as the individual, so you're not likely to have Cali department of revenue problems... they get their money no matter what, since you're living in cali and since there is not separate corporate income tax for S-Corps or LLC's, you might as well save the money by forming in another state.

      Save yourself some trouble though... spend a bit of money on a consultation or call around for a free consult with attorneys familiar with your state laws and the state you would want to Inc in. You don't need anyone to file forms for you, it's easy enough to do it yourself.
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      • Profile picture of the author JC Web
        Originally Posted by iAmNameLess View Post

        ...
        The way an S-Corp is, CPAs typically recommend you paying yourself a "reasonable" salary, at 1/3 of your net profit. That salary gets taxed like any job you would have. The rest of the income, you receive as "distributions" and you don't pay self employment tax on.
        ....

        If you're in Cali, and you're wanting to Inc up or form an LLC, you definitely need to speak with an attorney and an accountant. If you're doing internet marketing, I would think you should ask your attorney or accountant about whether it would make sense for you to incorporate or form an LLC in another state, to avoid the franchise tax, among other things. In the end, your income passes through to yourself as the individual, so you're not likely to have Cali department of revenue problems... they get their money no matter what, since you're living in cali and since there is not separate corporate income tax for S-Corps or LLC's, you might as well save the money by forming in another state.
        ....
        The kind of misinformation in this post is exactly why she needs to consult a local professional.

        You do not define a reasonable salary by 1/3 of your net profit and any CPA that tells you to do that should be fired.

        You also cannot get out of the franchise tax by forming your company in another state.

        And there is additional tax for S-corps both statewise and depending what county she lives in there may also be local tax she has to pay as an S-corp that she wouldn't pay as a sole proprietor LLC.
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        • Profile picture of the author iAmNameLess
          Originally Posted by JC Web View Post

          The kind of misinformation in this post is exactly why she needs to consult a local professional.

          You do not define a reasonable salary by 1/3 of your net profit and any CPA that tells you to do that should be fired.

          You also cannot get out of the franchise tax by forming your company in another state.

          And there is additional tax for S-corps both statewise and depending what county she lives in there may also be local tax she has to pay as an S-corp that she wouldn't pay as a sole proprietor LLC.
          Did I not say to consult with a professional?

          Ugh...

          The IRS doesn't have any definition for what the tax code refers to a "reasonable" salary. The majority of CPAs will recommend 1/3rd of your income be reported as wages. Younger CPAs will typically recommend HALF of your income...

          Yes... you can get out of the franchise tax by forming in another state. Virtual office with mail forwarding, registered agent, and filing fees in a specific state for an internet based business with no inventory/warehouse/storefront is quite common and there is a good deal of case law on this that's been around for about a decade now. I've done it. I've been there, dealt with it, and won.

          What you're theorizing, is something I've experienced more than once.

          The statewide tax in california is for 1.5% on net profits of a california corporation. A Nevada corporation distributing profits to a stockholder in California is not subject to the corporate tax.

          I've formed so many Corps, S Corps, and LLCs in many different states. I do have a pretty high legal bill, made mistakes along the way, learned a lot...

          Anyway, like I said before... call around for consults. I'd recommend looking into someone that practices in both Nevada and California to see what your options are. Jonas M Grant is someone you should probably call.
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          • Profile picture of the author JC Web
            You're giving her really terrible advice Iamnameless, so I hope she stops seeking advice here and goes on with pursuing advice offline from someone who will keep her out of legal trouble.
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