THE S CORPORATION
Like LLC’s, S Corporations offer the benefit of limiting the business liability at the entity level giving you protection from law suits.
Also S Corporations are a “pass through” tax entity, meaning that the taxable net income or loss (bottom line) passes from the entity’s tax return to your individual tax return; creating a buffer between your business taxes and your personal taxes.
One of the benefits of having this buffer is that the activity of your business doesn’t come under direct scrutiny on your individual tax return; essentially keeping your audit profile lower than if you reported your activity as a Sole Proprietor on your individual tax return.
Another benefit of having an S Corporation is an S Corp is NOT subject to the 15.3% Self Employment Tax (unlike LLC’s, Partnerships, and Sole Proprietorships)!
As you may already know Self Employment Tax (SE Tax) is a separate tax assessment over and above Income Tax that is similar to the Social Security Tax and Medicare Tax (at 7.65%) that is normally withheld as an employee on a W-2. SE Tax is twice the rate of the 7.65% (15.3%) because you’re both the employee and the employer.
Having a separate entity also has it’s drawbacks. S Corporations need to be licensed/registered with the state where business is performed. California S Corps pay an annual tax of the greater of 1 1/2 % of net income or $800. Taxifornia is one of the few states in the Union that charges tax for having the right to do business in the state. This right to do business tax applies to foreign entities as well so you can’t get around the tax for example if you own a Nevada or Delaware LLC that does business in the state.
Let me help you. Call me today to discuss how we can solve your LLC problem and help lower your audit risk. Anthony W, Imbimbo, CPA, 619-497-1040.
Look for part 3 coming soon describing Partnerships