I recently started business. It took one hour on the 'puter and was incorporated. I chose to be an S-Corp and not the popular LLC for this reason. With LLC there only LEGAL benefits but no TAX benefits! You are taxed as a sole propriator you pay that big 15%+ self employment tax right off the top of your draws. Or as an employee, the company, (you) pays half and the employee, (you) pays the other half. You still pay over 15% for medicare, FICA.
Now as an S-Corp You can pay yourself as low as you choose as long as it can be argued as reasonable. Say 18.50 per hour. This should cause a profit build up in your business. Take it out as a DIVIDEND or DISPERSMENT. There is no Medicare tax liability owed on this at all! You can save a lot of money this way. An S-Corp is only going to owe tax on gains from selling assets. Or gains on assets from before being an S-Corp. It's a C-Corp that pays tax on dispersments.
I know people that have paid themselves as little as 1K for the year and took the rest as a dividends. However if the IRS chooses to fight them the IRS will win because the pay cannot be argued as reasonable.
My business is an S-Corp. The benefit for me according to my accountant is that I only pay SS tax on the payroll checks I draw, not the entire check received/invoiced (as you would in a sole propriotorship). I don't know anything about an LLC.
I think doing any of this without the services of a lawyer and accountant would be like asking a carpenter to do your electrical service.
Re: Why pay all that tax with - LLC ?#156080 03/13/0506:06 PM03/13/0506:06 PM
Dave, >I only pay SS tax on the payroll checks I draw, not the entire check received/invoiced (as you would in a sole propriotorship). I don't know anything about an LLC. <
You would never owe tax on Gross reciepts any way! Since you are the owner of the business you are paying out both sides of the SS tax. More than 15% of your gross pay. Thats no better than Self employed tax.
>I think doing any of this without the services of a lawyer and accountant would be like asking a carpenter to do your electrical service.<
I used to think that until I realized they want you to think that the tax laws are "beyond your comprehension". It's called job security! Unless your that big million dollor client, they don't want to take time to really show a GOOD business strategy. I had four different accountants and none cared to show me the benefits of taking dividends. If you are not taking any dispersments than your accountant is doing you a disservice.