The wheels are turning on my pizzeria I’m opening sometime this fall and I need to sort out legal matters.
I’ve read up on corps and LLCs and have been leaning towards the LLC. Anyone have advice? I’ve heard tax benefits are better with corps but LLC have tax flexibility. How do ya’ll set up yours?
s corp
Why was that the right fit for you, John?
My accountant told me that a single member LLC lacked the liability protections of an S corp. He suggested that I add my wife as a managing member of the LLC in order to have the same protections. I believe that as far as the IRS goes, an S corp and an LLC taxed as an S corp are equal in their tax liabilities. It should be noted (at least in Florida at the time that I registered my entities) that the S corp is an election election that must be filed separate than the corporate docs.
Great feedback, Paul. I know they say the LLC is much easier to set up I’ll have to look into the managing member.
S corp here. I looked into both LLC and S corp and settled on the S corp. Here in CO you technically can not pay yourself a paycheck if your a LLC (tho everyone does). My accountant advised me to file a S corp.
Sounds like I’ll need an appointment with an accountant and a tax attorney.
Liability protection of the two entities is identical. Don’t be distracted by the word liability in the name. I suggest getting liability advice from your attorney and tax advice from your CPA. (not vice versa!)
LLC active income to members is taxable as ordinary income subject to FICA/Self employment tax (unless you elect s-corp treatment for the LLC which can be done). While the income tax on income you receive from the two types of entities is the same, the FICA/Self-employment tax is NOT the same. S-corp dividends are not subject to FICA. This is a real tax advantage. For example, if your business earned 100K and you take it all as LLC distributions you will owe about 15K in FICA/Self-employment tax. If your entity were an S-corp and you took a 40K salary (as manager) and received 60K in dividends from your ownership of the entity you would owe ~6K in FICA on the salary but none on the dividends, a savings of $9,000. ically the W2 income compensates you for the WORK (active income) you do in the restaurant and the dividends compensate you for the RISK taken with your investment (passive income) and is why they are taxed differently. Talk your CPA (Not book keeper!) about how much W2 vs dividend income you should take from an S-corp.
S-corp income must be distributed according to ownership %. In other words, if you have a 30% partner, they get 30% of the entity income reported. (This comes after any W2 income received) In an LLC, like a partnership, income can be distributed in any % you choose. So, for example, a 30% owner could receive 50% or 20% or any other % the owners choose. This is the flexibility mentioned in the original post. If you have an investor/partner that does not work in the business you may want to put together a deal like this. I have seen scenarios where a family member invests 50% of the start-up cash for 50% ownership but the agreement is that they receive 10% of the income until bought out. In that case the LLC would provide that flexibility in the assignment of income. In the end though, pretty much the same thing can be accomplished with adjustments to the W2 income paid before the entity income is distributed.
Talk to your CPA rather than some forum on the internet. I suspect they will tell you what mine did; that S-Corp is the way to go for active income (means you work there) and LLC is preferable for passive income (investment income is not subject to FICA anyway) unless you need the flexibility of disproportional distribution in the assignment of income provided by an LLC. That is the reason I own the property my business is located in in an LLC and I own the business itself in an S-corp.
I don’t know who “they” is but having set up four s-corps and two LLCs, I can tell you that “they” are wrong. Both are very easy to do. You can do all of it online yourself or you can pay a professional to do it. The first time it might take you a couple of hours to find your way through it but there is no appreciable difference other than going on the IRS website to do the s-corp election which might take you 15 minutes if you do it wrong the first time.
Thanks very much for the feedback I will set up an appointment this week. Now you know why I sought advice on " some forum on the Internet" 
My company is an LLC that owns several businesses. Within my LLC is my pizzeria, set up as an S-Corp. Getting advice from a lawyer is the best way to go. Every state has unique laws that you as a business owner can take advantage of, if you have the right advisor.
From the SBA website
[SIZE=4]Disadvantages of an S Corporation[/SIZE]
[LIST]
[]Stricter Operational Processes. As a separate structure, S corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance.
[]Shareholder Compensation Requirements. A shareholder must receive reasonable compensation. The IRS takes notice of shareholder red flags like low salary/high distribution combinations, and may reclassify your distributions as wages. You could pay a higher employment tax because of an audit with these results.
[/LIST]
If I register an S corp I will be meeting myself for coffee to discuss operations? I keep logs of such meetings?
If I plan to pay myself 1500 in wages with a projected profit of 2k to 4k I could be subject to reclassification?
"If I register an S corp I will be meeting myself for coffee to discuss operations? I keep logs of such meetings? "
Yes, that is pretty much it. Although I doubt many single shareholder s-corp owners actually do much of this. You should have an annual shareholders meeting. You can choose the beverages! If there is only one shareholder there won’t be any stock transfers to record.
If I plan to pay myself 1500 in wages with a projected profit of 2k to 4k I could be subject to reclassification?
Ask your accountant. My accountant said that I need to take a reasonable wage that could arguably hire a replacement for the duties performed. But there is also provision for start up businesses not taking a salary until start up loans are re-paid… again, ask your accountant. This item is exactly what I was talking about in my post above. Only shareholders who actually work in the business need to take any compensation.
Thanks very much, I sent an email to my accountant this morning.
LLC’S are better for raising $$$ I’ve had both…same cost to set up…easier to run a LLC IMO…I had partners in the last LLC…easier to give 'em the boot…
Is your taxation filed as an s- corp?
S corp & LLC are taxed thru to the owner…no difference in rate…
Not entirely… the difference is that all income from an LLC is passed through to the members as ordinary income subject to both income tax AND Social Security. Dividends from an S-corp are NOT subject to social security. To the extent that a good portion of the owner income from and S-corp can be dividends, this can be a pretty big difference. (Yes, it is also possible to set up an LLC to be taxed as an S-corp in some situations)
I have both. No difference.
I got all kinds of different answers from accountants today. One said lawyers prefer llcs. One said they preferred llc taxed for s corp and on said the irs can chose to deny you s corp taxation as an llc.
still waiting to hear from MY accountant