LLC vs. S-Corp - Which is better tax savings in California?

Question

My wife and I are starting a company in California. Most likely only my wife and I will be the only people that will work for the company so we don't plan to pay employees in the near future, however if we expanded in a few years, we definitely could. From a tax / profit standpoint, which should we choose? I know that LLCs are easier in a number of ways but which will save us money? I do know that LLCs have $800 minimum to pay per year to operate in the state.

I have heard people say one or the other but not really cite the true facts, %, and numbers that would be paid for each.

Thanks for your help!

Answer 1

LLC's carry no tax benefits. A two person operation is usually taxed as a partnership whether it is an LLC or not. The biggest advantage to an LLC is legal liability protection.

An S-Corp is a separate entity and requires a lot more paperwork. It may save you a little in taxes if done right but there are a few other issues. First of all, you and your wife would be employees of the corporation. This would require payroll tax withholding (FITW, SITW, FICA) as well us payroll taxes (FUTA, SUTA).

I don't recommend forming a S-Corp. right away. Walk before you run.

Answer 2

Llc Vs S Corp California

Answer 3

S Corp Vs Llc California

Answer 4

An Limited Liability Company will not save you any money on taxes because it is treated in the same way as a sole proprietorship or partnership for taxation purposes. The main advantage of a LLC is that it provides the protection of a 'corporate veil' or Limited Liability for its owners/ operators (just like any other type of company). People use Limited Liability Companies because they are simple and easy and generally require less administration than operating as a Corporation. In C Corp, the taxes are paid as separate entity. Though the C Corp has to pay the taxes on the profit that it gets, there is no need for the shareholders to pay tax for the profits of the corporation. An S Corp has to file only a K-1 informational tax return. The S Corp does not pay the taxes but the shareholder has to include the profit that they get from the S Corp in their tax returns. The best structure for tax purposes out of a C Corp and an S Corp would depend on whether you were distributing dividends or accumulating the profits within the Corporation. If you want to save money on tax, you might want to look into a more complex structure, such as a trust (or a Corporation owned by a trust) or an Offshore Company and/ or bank account. Due to the complex nature of the law, you should seek legal advice before deciding on a business structure.

Answer 5

First, just in case this helps, California does not allow LLCs to have professional licenses (like contractors or real estate licenses) so a corporation would be the only way. From a tax perspective you can elect to have an LLC taxed like an S-Corp, so the LLC is normally a better choice if it is available because it is easier to administer and can be taxed either as a partnership or as an S-Corp. Both LLCs and Corporations pay the annual $800. You also have to pay a small tax to the State when you have an S-Corp. You should consult an accountant on which election (partnership or S-corp) makes sense for your particular business.

Answer 6

An LLCs earning are self employment earning and subject to self employment taxes. In a S corp only the payroll is subject to self employment taxes and the excess is not subject to self employment taxes. This is the biggest difference and one that most attorneys who lean toward LLCs do not understand.