All Things Tax

All Things Tax

Like the title says, from the filing process and tax questions to tax policy and reform, you can search and share All Things Tax here. This is the place to find answers to all your general questions that don't fall under the other categories. And just a reminder: questions about software or online filing should be posted in DIY Products.

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Valued Pioneer
Posts: 3
Registered: ‎07-11-2017
Accepted Solution

New LLC

I just started a new business and formed an LLC. Planning to do it full-time while my wife will continue her regular job and assist when possible. My question is which is better to set it up as, a Single-Member LLC or a Mulitple-Member LLC (with my wife as a member)? I know there are benefits on doing a multiple-member LLC when it comes to liability protection and also from other partners, but since it's just me and my wife, I'm more concerned about the tax implications. Should I set it up as a multiple-member LLC for tax advantages? Or as a Single-Member so it will be a disregarded entity and filed as a sole proprietorship on a schedule C? I was told by someone though that I could file it as a S-corp (2553) to avoid double taxation if I go with Multiple-Member and still have the benefits of the liability protection. Which of the 2 has less costs/taxes?
Tax Pro
Posts: 5,727
Registered: ‎02-23-2016

Re: New LLC

Hi C1014,

 

 

Welcome to the H&R Block community.

 

So if you set the company up as a sole proprietorship or a single-owner LLC then the income taxes are quite simple.  You're correct that a single-member LLC is a disregarded entity and that you would complete a Schedule C.  You are taxed only on your net income.  In other words you only pay tax if you earn a profit.  Expenses of the business are deducted against the income on your Schedule C to determine your net income, and nearly all types of business expenses are deductible though some have special rules.

 

It works the same way for partnerships and multiple owner LLCs except that income and expenses are reported on a 1065 return and your share of the net profit or loss that you report on your tax return is reported to you on a Form K-1.  You still pay the federal income tax and the self-employment tax on your share of the company's net income (which is 100% in your situation assuming that you file a joint return with your wife).

 

You could also set up the company as an S-corporation.  The thing about S-corporations though is that you will not actually save as you might think.  Before an S-corporation can post a profit the company must pay anyone working for the company, including yourself, a reasonable salary on which you must pay tax.  The rule of thumb is that the company must pay you the average salary earned by others in your profession in your area.  For instance, let's say you start a plumbing company as an S-Corporation.  Your company does extremely well in its first year and your revenue tops $100,000.  Your expenses (not including your salary) are $30,000 so you have $70,000 remaining in the bank.  The average plumber in your area earns $45,000, so you must pay yourself at least $45,000 for the year.  Most people who own S-Corporations pay themselves on a W-2, so going that route you will owe 7.65% FICA tax plus federal income tax on your $45,000 salary and the company will pay the other 7.65% FICA tax.  However, you will avoid FICA taxes on the $25,000 that your company profited after salary and other expenses.  Note that there is not actually a specific method of determining a reasonable salary under the IRS rules, but the rule of thumb that I just went into detail with is the best option.

 

Let's say that the facts above are the same, except that your company had $150,000 in expenses.  Since your revenue was only $100,000 your company lost $50,000 and you nor the company will owe any tax.

 

I'll go through one more S-corp example for you.  The facts above are the same, but let's say that your company incurred $80,000 of expenses during the year.  Since revenue was $100,000 you've only earned $20,000 before paying your salary.  Therefore, since the average plumber in your area earns $45,000 you must pay yourself what you can, you have to pay yourself that $20,000 that is left over after deducting your company's other expenses from revenue.

 

So now that we've seen all three options, here is what I suggest.  First, keep it simple and choose either the single owner LLC or the S-corporation.  You can have an S-Corporation with only one owner if that's the way you decide to go.  An S-corporation requires an 1120S return and reports your income to you on Schedule K-1 so it's a little more complex than a single-owner LLC.  If you want to keep this really simple, go with the single-owner LLC for the first year.  Most businesses will not earn enough to be affected much, if at all, by what you're referring to as "double taxation" in their first year so you will be just fine completing the Schedule C and it will be much less strenuous but you'll still have the liability protection that comes with having an LLC instead of a proprietorship.  You can always reorganize the company as an S-Corporation later on if you get to a point where you're making enough that you think you'll be able to save some money on FICA tax on a portion of the income.

 

Finally, no matter which option you go with, you'll want to save a record of all of your expenses throughout the year so that you can take the maximum amount of deductions possible against the business' income and not pay more than necessary when it comes to your tax bill.

 

If you have any other questions I'll be glad to help.

 

Louis,

Senior Tax Advisor (Tampa, FL)

Valued Pioneer
Posts: 3
Registered: ‎07-11-2017

Re: New LLC

Hi Louis, thanks so much for the information and the assistance. I appreciate the detailed explanation and examples you provided. But as you probably know now, I definitely am not knowledgeable with this. But let me see if I understand it so far. Before I start, I just want to confirm with you that I have already established the entity and filed it with the state (CA) for an LLC. So it's not an option to go with a straight sole proprietorship or S-corp. On the application, it asked "The LLC will be managed by:"... and had 3 choices (1 manager; more than 1 manager; All LLC members), I had checked off "MORE THAN ONE MANAGER", since the initial plan is for my wife and I to do this (although at this time, it will be primarily me). Just wanted to share that info to see if it makes a difference on what is filed with the state. I'm applying for my EIN number and this is where it got complicated for me since it's asking to choose either a single or multiple-member. Do I even have the option to still make that choice since I listed "more than one manager" on my state application? If so, here is what I understood (please bare with me if I didn't get it rightSmiley Happy

There is no significant difference in taxes with both other than how it's filed (other than one is more complicated than the other). Schedule C for Single member and 1065/K-1 for Multiple member, which I would have to pay myself a salary via W2. Either way, I would still have to pay both federal and self-employment tax on the net income. But based on your example of $100k rev, the taxes on a SMLLC would be the whole $70k (less the $30k expenses) since that is my net profit. Versus the MMLLC filed as an S-corp where my company would pay 7.65% taxes on my $45k paid income to me, then I would pay 7.65% + federal taxes my own on that $45k as well. And the remaining $25k net profit of the company will not be taxed the FICA. Is that right? Or did I just miss the whole thing? Smiley Happy)

Are there additional taxes I missed to apply on the $25k based on the MMLCC example?
Are the tax percentages/requirements different between SMLLC and MMLLC?
Would I pay 15.3% FICA + federal taxes on the whole $70k on the SMLLC example?

I do like your suggestion of making it simple and just file it as a single-member LLC to make it easy. You are correct that we do file a joint return with my wife. I just want to make sure that I still have that option to go SINGLE-MEMBER after what I had mentioned earlier that I checked off in initial LLC application to the state the "more than one manager".

Thanks again for your help.
Tax Pro
Posts: 5,727
Registered: ‎02-23-2016

Re: New LLC

Hi C1014,

 

You're quite welcome.

 

Even though you already formed the company as an LLC multi-member it can be changed without having to pay anything extra.  You can also go ahead and fill out the EIN application as a single member LLC now if that's what you decide on since that is through a separate taxing authority from the state (just be sure and update the state when you have the time).  For the state application most states have a way to make changes (or update) the license.  In Florida for instance we have to mail a form to the state to change details on the application/license without re-registering and re-paying and it can be done at any time.  If you're unsure of how to make a change your state's division of corporations will know the answer.  Your state government's website will have a phone number for them in their "contact us" section.

 

You've got the Schedule C versus filing as an S-Corp exactly right.  As a single-member LLC you'll pay the FICA tax on all of your net income, but if your company makes enough so that you are paid and you turn a profit above your pay then there's no FICA tax on the net profit over your pay.

 

(1) You didn't miss any taxes on the multi-member LLC example.  The only other tax that I didn't mention is the federal & state unemployment taxes which the company will pay on the income that you pay yourself (if you pay yourself with a 1099-MISC then there are no unemployment taxes and you pay all 15.3% of the FICA tax on your income).  Federal is 6% and state is usually quite low.  Florida for instance is less than 2%.

 

(2) The tax percentages are the same for all types of businesses.  The difference is that if you file as an S-Corp and pay yourself with a W-2 then the FICA tax is split in half between you and the company instead of you paying all of it.  Also, the company does not pay federal income tax.  Since all of your options are pass-through entities, only you pay the income tax.

 

(3) In the example where you were a single-member LLC and your profit is $70,000 yes you would owe 15.3% FICA tax + federal income tax on the entire $70,000.  However, you get a deduction for 1/2 of the self-employment (FICA) tax directly on the 1040 which will reduce your taxable income for the income tax.  Tax credits can also significantly reduce both the income tax and the FICA tax, although FICA can only be reduced by refundable credits.

 

 

Like I mentioned before, I think the way for you to go is to keep it simple and go with a single-member LLC for the first year, maybe two years, until you're making enough of a profit that the company would actually save money by filing as an S-Corp.  You can update the state registration & EIN when you get there.  I might also add that EIN numbers cost nothing to apply for or to change, and it can all be done online through IRS.gov within a few minutes.

Valued Pioneer
Posts: 3
Registered: ‎07-11-2017

Re: New LLC

Awesome!! Thanks again for such a thorough explanation. Much appreciated. Have a blessed day!!
Tax Pro
Posts: 5,727
Registered: ‎02-23-2016

Re: New LLC

Welcome.