My husband and I formed an LLC and need to decide whether to be taxed as a partnership or S-corp.?

Question

We are the managing members each with 50%. My income outside of the business is close to FICA ceiling . My husband's sole income will be through the new business. The income for the business will probably be zero to $ 50,000 for the first two or three years. Is there a tax election that is beneficial under this scenario?

Answer 1

NO.

First, if you have already formed an LLC, all income of the LLC will flow through to the members and managers of the LLC (similar to an S-Corp.). You have NO choice. There is no election to make.

Second, neither partnerships or S-corporations pay taxes. In both situations, the taxes flow through to the owners and the owners pay personal income tax on their shre of the earnings. Again, you have NO choice. There is no election to make.

Third, the ONLY time you can make an election of this type is when you form a new corporation. You must elect to be taxed as an S-corporation within 90 days of incorporation or you the new corporation will automatically be taxed as a C-corpoation.

Fourth, you can only reach the FICA ceiling personally from all sources of personal income, including your share of s-corpoation, partnership, and LLC income.

Fifth, the incremental income from the business may put you and your husband into a higher marginal tax bracket. Welcome to capitalism and progressive tax rates.

Sixth, you are ONLY personally liable as the general partner of a partnership. You are NOT personlly liable (except in fraud, gross negligence and willful misconduct) when you own an LLC or shares in a corporation (C or S).

Answer 2

You can leave your income to accumulate which means there are no taxes due, and have him take additional money as advance from future earnings. That's probably easier with the S-corp setup.
That can make a difference if you have your income taxes separate.
Otherwise it really doesn't make a difference
The above reply (not mine) is incorrect, as you are protected via the LLC

Answer 3

S-Corp. It's the safest. If you form a partnership and for some reason wind up getting sued and the lawsuit is decided against you then you are both personally responsible for the amount of the settlement. (It comes out of your own pocket, savings, IRAs, house, car, etc.)

If you form an S-Corp then your personal holdings, personal bank accounts and personal property should not be part of any settlement. (They're suing the corporation, not you.)

There was an engineering firm here in the Dallas-Fort Worth area that was formed as a partnership. They were successfully sued for $40,000,000. The partners had to come up with that money out of their own pockets.