#629 LLC Vs S-Corp Explained in 10-Minutes

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In this episode Mat and Mark conquer a huge topic in 10 minutes. LLC Vs S-Corp, when to elect and how to maximize your entity structure for your specific situation.

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Transcript

Welcome And The 10-Minute Challenge

SPEAKER_01 0:00

Welcome everyone to the Main Street Business Podcast. This is Matt Sornson, joined by the incredible Mark J. Kohler. Two lawyers coming at you fast in 10 minutes or less talking about LLC versus S Corp.

SPEAKER_00 0:12

Which one should you use? And we're going to try and do it. Siri, start timer, 10 minutes. Okay. 10 minutes. This is it. All right. Now, many of you out there are probably deciding what entity you should be. Well, let me give you a little spoiler alert. This is really sole proprietor versus S-Corp because an LLC can be both. When you file an LLC, you have the choice: should I be an S-corp or should I just stay a sole proprietor? Because you get the same asset protection with both. This is really down to the taxes. And so I think that's really what we're comparing. Okay, Matt. And I'm going to take sole proprietor. I'm going to take the tougher one to win here because I think I'm up for the fight today. Are you willing to take the S-corporation? Please. I got the better horse. So you think.

Asset Protection Is The Same

SPEAKER_01 1:01

Yeah, and I think that's probably the first thing at the outset. Let's just talk about asset protection, actually. It's about the same. If I have a corporation with an S election on it, or I have an LLC, no matter what tax election I choose on it, if something happens in the business, customer, tenant, whatever, they've got to sue the entity, LLC, S corporation, doesn't matter, but they can't go after me or my personal assets. So I get that asset protection, no matter which entity I use. So I think let's just get that one off the table. We're getting asset protection either way.

SPEAKER_00 1:32

Okay. I like

Write-Off Myths And What Counts

SPEAKER_00 1:34

it. And let's get another issue off the table. Your write-offs are going to be the same. Whether you do an LLC or an LLC taxed as an S-corp, you will be able to take dining, travel, auto, home office, all the write-offs you would in either one. Don't let anyone tell you that, oh, well, if you do an S-corp, you get more write-offs, or you get an LLC, you get more write-offs. The basic business operational expenses will be treated the same. Think about it. If you're going to have a lemonade stand, you're going to write off lemonade, ice, sugar, assign. You're telling me if you're an S-corp, you can't do that, or you get a better write-off. They're the freaking same. So same asset protection, same operational write-offs.

SPEAKER_01 2:21

All right, but the taxes can be different.

S Corp Tax Savings Explained

SPEAKER_01 2:24

All right. This is the key here. This is where you're going to make which one do I want to choose? If I have an LLC tax as an S-corp, or I have an S-Corp, just right out of the gate, I did a corporation. I applied for that S-election with the IRS. So I'm taxed like an S-corporation. I have an opportunity to save on self-employment taxes. So when I'm paying myself out of that entity, I can pay myself a salary on some of the money I make, which I have to pay self-employment tax. That's your Medicare and Social Security, comes to 15.3%. But I also can pay myself profits or dividends out of the S-corp, which are exempt from self-employment tax, which is where the savings are for S-corporations, because I'm paying myself some money out of it, profits, I'm taking money out of the business that I'm not having to pay into Medicare and Social Security, which is 15.3%. That's a very simple simplification, Mark. I'll let you take it from there. But that is a reason why you should do an S-corp or an LLC tax as an S-corp.

SPEAKER_00 3:23

Okay, then I did my initial spoiler alert. Okay, now back to this one.

Extra Paperwork And Payroll Reality

SPEAKER_00 3:29

Okay, so if the S-Corp wins on saving self-employment tax, I'll give you that. I agree, but I'll tell you, you're gonna have to do more paperwork. You're gonna have to do payroll every quarter, doing a payroll report. You don't have to do a paycheck to yourself every two weeks and crap like that. If you've got ups and downs in cash flow, you can do it on paper with your quarterly report called the 941. But you're gonna have to do that as an S-corp, not as a sole proprietor. And you'll have to do a tax return for that S corporation called an 1120S, as in Sam. With a sole proprietor, I can pop it off on my 1040 with a schedule C as in Charlie. So the tax reporting paperwork is easier with a sole proprietorship, although it will cost me self-employment tax. Fine, I'll give you that one.

SPEAKER_01 4:20

Yeah. But if I'm making enough money, I'm gonna pay for someone to do my payroll at my tax return. Because I'm gonna be focused on making more money in my business. So let's say this. Let's say I'm making 80 grand a year after all my expenses. Okay. And I decide, I'll at least take half of that in a salary and half of it in profit. I'm gonna be very conservative. So, well, on that 40,000 of profit I'm taking, I'm saving 15%. That's like $6,000. I'll give $2,000 of that to the accountants to do that, and I'll keep the other four. So if you're in that scenario where you're making enough money, I think the S port pays for itself, even though I got more paperwork.

When S Corp Savings Actually Win

SPEAKER_00 5:01

Okay, but here's the problem. Some people make that Selection too soon because they get all hot and bothered on this savings strategy. And so if you're making less than $40,000 or $50,000 net, I'm a firm believer you might as well just stay as a sole proprietor. Because if you're making less than that, you're really gonna be breaking even, paying for the services of the accountant to do that extra work or the extra headache it's gonna cause you, versus the savings. So I think I think we we split the difference on that. Because if you're making more than 50, 60 grand, okay, S-Corp could pay off and still cover the costs. If you're making less than that, you may just want to stay as a sole proprietor a little longer until that right.

SPEAKER_01 5:49

When you say, yeah, I'd agree. And when you say stay as a sole proprietor, you mean for tax purposes. You're still setting up an LLC. You're an LLC with the state, and you've got the asset protection, and we've got the brand and the entity name. And the nice thing about that, and this is where we'd agree, I let's come together on this, is as I'm starting out in particular, maybe this

Start LLC Now Add S Election Later

SPEAKER_01 6:09

is a side hustle. I've been working for a few years trying to turn into a main hustle. I've got expenses, but I'm making 20, 30 grand a year. I don't want the S election yet. It's not going to save me taxes. It is just going to be more work. But eventually I'm going to turn the corner and I'm going to be making more than that 50K. And I want to just keep that same entity. But that's when you can add the S election later. So I think your final destination, no matter how you slice it, if you're an operational business owner, you're selling goods or services, is you will be an S-corp at some point. It's just a matter of when, as long as you're making money. I mean, if the business doesn't work, it doesn't matter. But you will eventually turn into an S-corp if you're making money.

SPEAKER_00 6:51

Well, I would hope all of you watching your goal is to make money. And with that in mind, and with that in mind, I would concur that you will end up being an S-corp. But I like your point, and I will agree with you on this, that the LLC really acts as S-corporation insurance. You can get your LLC out of the gate, you get started to you get you start your LLC right out of the gate, you start making some money, you get that brand, you get that name recognition, and then you can elect to be an S corporation. And when you do it, you can oftentimes backdate it to the beginning of that year, whichever year you do it. So the LLC is still a winner because I want that LLC in my back pocket, ready to pull that S election out when I'm ready. So the LLC is obviously better. Yeah, let me hit

Avoid S Corp For Rentals And Partners

SPEAKER_00 7:43

two others.

SPEAKER_01 7:43

I'm gonna talk against the S corporation now, okay? I'm gonna go against my own team here. All right. I'm gonna go over either there's two scenarios, or maybe I'll just take one at a time here. Here's a scenario where I don't want to do the S corporation, and you should neither. You've got a rental property. If you've got rental real estate, do not be setting up an S corporation. Okay, rental income, like when I own rental real estate, what am I making money on? Rent and capital gain when I sell the property. Neither of those types of incomes are subject to self-employment tax. They're entirely exempt from self-employment tax. The S-corp strategy is a strategy and additional work to save on self-employment tax. Well, I don't have it on rental income or capital gain income. So the LLC is cleaner. There's other tax reasons for it. I'm simplifying it there. But for rental real estate or your investment assets that are producing rental income, capital gain income, stuff like that, no reason to use an S corporation there. Let's just go LLC, whether that's a single member LLC, sole prop, flowing down your schedule uh E, I guess, or D, or whether that is a partnership, which is another entity we should talk about.

SPEAKER_00 8:50

Well, I'd love that you threw that uh rental property argument in the ring. Thank you very much. I'll take that if you want to throw yourself against the wall. I will also uh I will also point out that partnership issue. If you have a partner, you should always stay as an LLC. Now, if you're married, a husband and wife can have an S corporation structured that could be pretty efficient. But if you're gonna be in a partnership, you should stay an LLC. It's gonna give you a lot more flexibility and better tax planning, just like the rental property issue. If you have a rental property, you're gonna stay with the LLC. The S-corp has a role to play. The S Corp has a lane, but it's we're in a six-lane freeway. And so that that S-corp, we're gonna pull into that lane. If I have an operational business and I'm making enough money, then it's gonna really save me and it can pay off big time. But I'm glad I took the LLC. I think I think I'm winning this sector.

SPEAKER_01 9:49

Well, I I mean, I think, you know, we're both right. You know, we're coming to consensus here. And

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SPEAKER_01 9:54

I'll I'll say, so let me summarize a couple things here. Partnerships. Just do LLC. We're almost done. You get 20 seconds. Okay. Okay, I got my final my final thoughts. Do an S corporation if you're making more 50 grand a year, selling goods or services. That's it. Okay, I was gonna let you feel the balance of my time. I was gonna yield the balance of my time to the gentleman from the great state of Utah, the BIVs.

SPEAKER_00 10:20

If that was shorter than 20 seconds, I'll just say, in summary, always start with the LLC, get proof of product, proof of service. You can always make that change to an S Corp later. And if you're gonna have partners, you're gonna want to consider that LLC as a long-term entity for that relationship. I think this has been a great debate. I hope to see you in the ring another time, Mr. Sorensen.

SPEAKER_01 10:44

Yeah, and today's podcast episode is brought to you, by the way, brought to you today by KQS Lawyers, Mark and I's law firm where our attorneys have been advising clients across the country, been around for 25 years, setting up thousands, tens of thousands of LLCs and S corporations for business owners like you, structuring it in the optimal way for your specific situation. So let us know if we can be of assistance over at kqoslawyers.com. There's of course a link in the description below. And thank you everyone for listening to today's podcast. Make sure you're subscribed, giving it thumbs up, sharing it. We'll see you next time.