LLC vs S Corporation
Starting or growing a business? Chances are one conversation you’ve had (or wish you’d had) with your attorney and CPA is about the type of structure you need to have for your business or investments.
If you have appreciation assets, I think every informed advisor will tell you not put them inside a C Corporation. There are a few guys out there who will tell you to use a C Corporation for everything, including your personal residence. Guess how they make their living? Selling C Corporations!
A C Corporation can be a good choice in the right circumstances for a business. You may even consider one as personal income tax rates increase, especially since there is talk again that the C Corporation rate might be dropping.
But let’s focus today on the majority of businesses out there and assume you’ve got some legal and/or tax advise from someone who knows something about the subject and doesn’t have a dog in that fight. In other words, the advisor is objctive.
At this point, you’ll hear about the great LLC vs S Corporation debate. Most lawyers I’ve met will recommend an LLC. And, at least until recently, most CPAs will recommend an S Corporation.
The LLC, if set up and run correctly, will give both you protection from a business judgment and the business protection from a personal judgment. An S Corporation will give you only protection from the business, not the other way around. If you get sued and there is a judgment against you personally, you could lose the stock in your S Corporation. If you had an LLC, it would be protected.
If you have a partner, the LLC is more flexible when it comes to determining the profit percentage.
There is one big advantage of the S Corporation: the profits can flow to you in two ways – salary and distribution. The distribution, at least so far, isn’t subject to payroll tax.
This becomes even more important when the new Heath Care Bill surtax riders kick in, causing all earned income to get a penalty tax if you’re successful. Under current law, the distributions wouldn’t be subject to that penalty.
There was a movement in Congress to cause all income from the S Corporation to be subject to payroll tax, but it couldn’t pass the Senate.
So, at this point, the S Corporation is better when it comes tax.
The best answer is to form an LLC and then elect S Corporation treatment. You must also make a change in your Operating Agreement or in an amendment to the Operating Agreement. Fail to do this, and your whole LLC structure blows up.
That’s one of the tricks that we’ll be talking about Saturday July 24, 2010 for the “How to Protect Your LLC” teleseminar. Sign up NOW at http://www.DianesSeminars.com.
Please plan to dial in early because this is proving to be a VERY popular teleseminar!
How to Protect Your LLC
Saturday, July 24, 2010
10 am Pacific, 11 am Mountain, Noon Central, 1 pm Eastern