LLC or S corp ?

D

dsatish

Registered Users (C)
Hi All,
I got my GC recently and i want to incoporate a company so that i can work as a consultant on corp to corp basis. I know that incorporating a company has some tax benefits, compared to working on 1099(self employed). Which form of incorporation (LLC or S corp) is better to get maximum tax concessions ? Which one gives more flexibility for sharing rent etc as business expenses ?
I have seen many threads in this forum and also else where on the internet, but i am not able to decide . I know that both the types are almost similar and each of it has it's own pros and cons. Please reply only if you want to recommend one of these two options to me. There is no point in some one posting a generic answer (saying that it is upto me to decide). Just tell me what would you incorporate if you were an IT consultant getting around 100K per year as a consutant ? If the answer needs more questions, please ask them and i will provide more information.
 
Sathish , If i am you i will go with an S-corp . Its little complex to operate than a LLC but the troubles are worth the benefits ! ...Let me explain.

Both LLC and S-corp are pass thro entities meaning that the income will pass to you and you will be paying federal & state income tax on it in your personal return ...The difference comes in FICA tax (which is approx 15%) ...In LLC you will be paying FICA tax on all income but in a S-corp you will be paying FICA only on the salary you get from the corp but not on the dividend passed to you by the corporation

Also you can have more deductions with a S-corp than LLC (but C-cop is the best for deductions !)

So with a 100k income in a s-corp i will suggest to pay yourself a fair salary (say 40k) and pass 60k as profits to you . So the FICA tax is only on the 40k (which will be shared by you and the corp as payrol tax) ...

Pls note anyway you have to pay state/federal income tax on the total income !
 
Hi CoolDesiDude,

Got a question? What do u mean by 'Pls note anyway you have to pay state/federal income tax on the total income !'? In case of S-corp, FICA is paid for the 40K...right?
 
Wrangler , In a S -Corp you will be paying FICA only on the salary you draw . But Income tax is different , so you will be paying federal income tax for total 100k and also state income tax if any !

With a LLC you will be paying approx 15% of 100k as FICA tax on top of income tax
 
>> Which one gives more flexibility for sharing rent etc as business expenses ?

Whatever business formation (LLC,S/C Corp) you cannot just like that fully deduct your house rent ...The most you can do is deduct the portion of expense for the home office ...So say if you have a double bedroom house and you use one bedroom as office (which lets consider occupy 1/4 of the total space) , then you can deduct 1/4th of the rent and utility expenses ...
 
CoolDesiDude,

Tahnks for your reply. Can you please explain me how FICA works? Also kindly let me know the Income tax filing details.

PS: It would be great if you can expalin this process with numbers, so that it would be easy to understand the calculation....

Thanks,
Wrangler
 
Wrangler , FICA is nothing but Social Security and medicare tax ...When you are employed you pay approximately half of it and the employer pays the other half ...When you are self employed you pay the full which is approx 12% social security tax ( a maximum of 10k) and 3% medicare tax (no limit).

Income tax is the normal one you pay on income whether you are employed or do business (one difference is if you are employed income tax is withhold from your salary ,but when you are self employed you pay estimated tax only every quarter)

Here is the rate table for federal tax for 2003 ,wheather it will remain the same or different will depend on who is elected this november :)

http://taxes.yahoo.com/rates.html
 
CoolDesiDude,

Thanks for the reply. As you informed earlier, say I earn 100K per year and with a s-corp I pay myself a salary of say 40k and pass 60k as profits to me . So the FICA tax (100% which is approx. 15%) is only on the 40k. But u said in case of LLC, i need to pay FICA for the whole 100K.

When FICA, fed & state taxes are being taken from my salary every month or bi-monthly for 40k, how do I account the income tax assesment for the 60k (profit)?

Thanks in advance!
 
Thanks Mr Cool. Now i have decided to go for S corp (Actually i did more research after posting this thread and almost decided on S corp even before seeing your replies). Now among S corp and C corp which one do you prefer, if you were in my position ? I have no plans to expand my business or adding more people into my business. The main purpose is to get maximum tax benefits / maximum deductions. I know that it's little tricky selecting between the two (S corp and C corp) because S corp gives more tax relief where as C corp allows more deductions. What will be your final call, if you have any experience with this matter ?
 
Sathish , If you just going to work as a IT consultant i will suggest go for a S-corp ...

C-corp will be better if you are going to invest more on building/equipment (so more deduction/depreciation) and your business will grow to employ more people .
 
dsatish,did you start your company???? If yes what form is that ? Could you please post the pros and cons of LLC and SCorp.

CoolDesiDude, to work as IT consultant, you suggested Scorp. Do u think S Corp is good if I want to do import/export along with IT.

Thanks in advance
 
Kudiyan , Whatever the business if you are going to draw most of the income to yourself rather than re-investing it again on the business to grow it , then S-corp is the best way to do !
 
S-corp

With all the research, I'm planning to start a S-Corp.

Satish,Dude or wrangler or anyone else,
Can someone help with their experience ?

What are the procedure to start it ?
Where did u register it ?

Once you create it, if you dont make any profit or revenue from the company (I still working with someother company), Do you need to pay any fee yearly ?

Do you need to specify what kind of business are we going to start ? Is it industry specific ?
Did you get a CPA's help ? how did you get him ?

Please help me
thanks
RM
 
JoeF's answer - a CPA or lawyer will give you all the answers you need.


----People in this forum are so lucky that some is there to tell us this ( As if people here are illiterate that they do not know what CPAs and lawyers do)---
 
1099

Hi,
I have been reading the pros and cons of the corporations for a consultant.
I also want to become independent, but I don't want to start a company at all, I want to keep it simple. I am thinking of simply working on a 1099 without a company. My client company is OK to do that.
Does anyone have anything negative to say about this style of working? Any obvious cons?
Any expenses I can claim at the end of the year while filing taxes?
Any response will be appreciated.

Thanks
JR
 
1099

Hi,
JoeF, thanks for the reply.
I'm not sure I understood what you meant by my assets not being protected. I won't be working as a business, just as an individual. You mean, a client company can sue me if (God forbid) something went wrong?

Thanks
J R
 
Any good suggestion about insurance

JoeF, I agree with you. One has to tread very carefully on errors and omissions and IP liability issues. It was working fine with me till the time I left a job where the employer found difficult to let me go as they were paying too less. They thought that by sponsoring my GC, they had the slave for N number of years. Well, I left and tried to solicit the contracting business (besides full time job with new employer’s consent). Ex-employer’s attorney sent me a threatening cease and desist letter. Well once I got an attorney shoot back at them, they never responded. I have since got the GC and would soon start the business.

In all, I need to be very cautious and must not use any code even if I vaguely remember. But the US is litigation friendly country. And I must safeguard my assets in such cases. Besides incorporating I must also buy errors and omissions insurance along with IP protection cover. If someone were unhappy like this ex-employer, filing a lawsuit would be more than enough to get me bankrupt. Could someone suggest his or her experience in buying such insurances? I got one quote from an agent of Lloyd Insurance for nearly 5K. Any other good insurance you would recommend.

Thanks
 
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