LLC or S-Corp for individual consultant?

Hi Vuzzbox,

I recognize this is an old post, but I wanted to clarify some points in your post. I am a CPA that specializes in independent contractors. From a legal protection standpoint, an S corp isn't an entity at all.. it is purely a tax entity; i.e., you can sue an LLC or a C corporation, you can't sue an S corporation because it doesn't exist in the law. You can tax either a C corp or an LLC as an S corp by election.

Secondly, from a tax standpoint, there are very significant differences between taxing a single member LLC (SMLLC) and an S corp. a SMLLC is not required to file a separate return. It is simply filed on a schedule C on the Form 1040. However, an S corp files an entirely separate return (Form 1120-S). The S corp is able to avoid taxes that a SMLLC is not able to avoid.

On the bright side, we both totally agree on the fact that you need to form an LLC, but then you need to elect to have it taxed as an S corp for tax purposes. The savings can be significant.

Best wishes,
Brock Andersen, CPA
888-959-2829
brock@ictaxadvisors.com
www.ictaxadvisors.com

It all depends on specific circumstances - though in general it's better to stay as a contractor for tax purposes. You are able to have many more tax deductions if you work on your own or via LLC, rather than a FTE. However, you need to consider possible benefits the company could offer you if you were an employee.

Hi Matt,

You're asking a very good question. California does impose a 1.5% income tax on S corporation net income, so it's wise to figure it into any tax strategy. In many cases, it still makes sense to do the LLC/Scorp, but I hesitate to give you a simple yes or no answer, because the potential benefits or disadvantages of an LLC/S corp structure depend on a number of factors specific to your situation. I'll ask some questions here, but if you're more comfortable discussing over the phone rather than through this forum, just give me a call at 480-499-5297. We work with clients all over the US, so it's no problem that you're in CA.

Questions relevant to your inquiry:
1. How much do you anticipate earning with this corp to corp arrangement?
2. Do you have a sense for how long the contract will last?
3. Are you currently working as a W2 employee?
4. When would this corp to corp contract start?
5. Other than this corp to corp opportunity, will you have any other sources of income?

There may be other questions that I need to ask, but this is a good start. I look forward to helping you in your decision.

Brock Andersen, CPA
IC Tax Advisors LLC
480-499-5297

It probably depends on how your LLC is set up. Did you make an s-corp election? Are you paying for unemployment insurance? Even if you are eligible, if you use a lot of the benefit, your premiums will likely skyrocket.

No. Officers and shareholders are not eligible for unemployment benefits. You shouldn't be paying premiums for officers and shareholders either.

Also, if you did collect your LLC would still have to pay you a percentage of your salary. Your premiums would then increase.

You ABSOLUTELY need to be set up as an LLC / S - Corp.

Additionally, when you break out your accounting in to a business and personal situation it becomes SO much easier to handle the book keeping and accounting.

No matter what, its going to save you money and headache managing things.

As a corporate entity, you can insure the business against any fault. When people hire the business, the business is at fault if they decide to sue you for anything, not you the individual.

There is no tax difference between an LLC with S corp election or a regular S corp. They both result in the same thing. However, there is usually a little bit less paperwork on the legal side of things with an LLC filing the S election. As such, if you're going to go the s election route, I suggest you first form an LLC. Are you still in CA? How much longer does he anticipate doing contract work?

Well, the move from CA to TX by itself will have a very positive impact on your taxes. Yes, we recommend you form an LLC and then make an election to be taxed as an S corporation. Then, he will need to pay himself a salary as well as maintain bookkeeping, and pay quarterly taxes, and file an annual S corporation tax return.

1) No big deal. That’s fairly common. You would need to follow any requirements for that state. (Annual reports, or fees.)

2) I believe a LLC is already “pass-through” taxation anyway. That means the profit or loss goes on the owners’ 1040 tax.

Corporations all begin as C (Business pays tax on profit) and have to “elect” to become a S-corp.  (Owner’s pay tax)

You should double check for a LLC.  You’ll want the profit or loss to pass though to the owners.  If it doesn’t you’ll get more paperwork and more tax.  The business will pay corporate tax, then you’ll pay income tax on the dividend.

I once owned an LLC and the profit passed-through to me.

3) With one owner the money doesn’t actually matter. You aren’t taxed on the money, rather the profit or loss.

Example:

    Your company brings in $70,000 in revenue.

    Your business pays your wife $50,000 a year in salary.

    You spend $10,000 on expenses.

    The business makes $10,000 in profit after expenses are paid.  $70 - $50 (salary is an expense) - $10 expenses.


    On your taxes you’d show:

    $50,000 from W2.

    + $10,000 schedule E. (100% of the $10,000 profit)

    You’d then have a Adjusted Gross Income (AGI) of $60,000 

In this example it doesn’t matter where the $10,000 in profit went. You can take it, or leave it in the bank. Either way you’ll pay income tax on the $10,000.

IF you have more than 1 owner that’s different. You’d have to share the $10,000 with the other owners. If you owned 50% you’d be entitled to only $5,000 of the profit.

4) I’d suggest “cash based” accounting. It isn’t as accurate as “accrual based” but it is MUCH easier. Consulting is a simple business. If you’re doing cash based here is how that looks:

January:  Did $100 worth of work but didn’t get paid yet.
February:  Didn’t do any work.  Collected $100 from last month.

With cash based, January was a loss and February was pure profit.  From an accounting perspective this seems wrong and stupid.  It’s simple though.

You simply count the cash.  Same for expenses.  For most items you can treat them as an expense that is now worthless.  You don’t have to depreciate the asset.

This is great if you buy a computer.  For small business you can simply say your $1,000 laptop was a $1,000 expense.  A larger business would have to factor in the current value of the laptop and only take it’s depreciation as an expense.  That is a lot of work.

So, in effect, the answer is "it depends."

But from a federal tax perspective, if you elect to file as a sole proprietor (single-owner business) you reconcile your business income and expenses on Schedule C that's filed with your 1040. In this case, you don't pay yourself a salary - you pay yourself and consider it "owner's draw." You'll want to draw enough out of your business to pay quarterly estimated taxes to the IRS, and probably also to your state/local tax agency, in addition to what you expect to be profit from your business.

I usually leave most of my money in my interest-bearing business account and only withdraw my "salary" (including enough for taxes) when I need it. That way, if I have a big expense (i.e., for equipment) the money's there and I don't need to put money into the business account from my personal funds to pay for it.

I can help. To your questions:
1. Yes, however, the deadline for a 2018 election was on March 15th. To do a "retroactive" election, you would need to file it under Rev. Proc. 2013-30.
2. If the DBA is owned by the LLC, then this isn't a problem. More important, though, is what is reflected on the Form W-9 that you and your wife provide to your clients.
3. While this is a good question, there are far too many unknowns to address this question. What do you do for a living? How many hours do you work? What city/state do you live in? How many years of experience do you have in your field? etc. These things and more shape the decision around what is "reasonable".
4. Because the S corp is still legally an LLC, depending on your state, there are generally few corporate formalities to follow than if your business was a C corp/S corp.

Please note, not all states or cities are optimal for S corporations, so you may want take that into consideration as well.

We would recommend you avoid DC if you can. It has some very unfriendly flow-through tax laws compared to the states around it. That said, if you are conducting business in DC and/or living there, you may not have a choice. This is because even if you form in another state (let's say Delaware), if you are conducting business in DC, then DC is going to require you to register the DE entity in DC as well. Are you personally subject to income taxes in DC or another state?