LLC, S-corp or continue as a sole proprietor?

April 3, 2007 6:58 PM

LLC, S-corp or continue as a sole proprietor?

I've run a side freelance photography business for 4 years now and I expect it to become my sole income in the near future. I'm looking into the various types of incorporating and I'm wondering if I even need to or are the tax incentives worth the extra paper work and costs. I understand the idea of being shielded from liability but that's not the incentive. I don't have any partners so I'm unsure of the justification to go the s-corp route versus LLC. I've already established a business account but my earnings currently get lumped in with my 40-hour/ week job and my spouses earnings. Part of my desire to incorporate is to seperate my business earnings from my "family" earnings to make things a little easier at tax time.

(and I know I need to run all of this by a real live cpa but I'm just looking for some direction - thx)

posted by photoslob to work & money (19 comments total)

fwiw I run a small art sells and promotion company, which would be related to what your doing, and was advised to go LLC as the easier option
posted by edgeways at 7:06 PM on April 3, 2007

Lawyer.
posted by Ironmouth at 7:39 PM on April 3, 2007

Great. I'll see a lawyer too.
posted by photoslob at 7:40 PM on April 3, 2007

i think that an llc is easier than an s corp, but i would really make sure that you are actually getting any type of tax break by switching from a sole proprietorship to something more formal, because it's not guaranteed (and definitely a lot more hassle). i set up a business as an llc, but it was for liability purposes, and so far the change has been a huge pain and not that worthwhile (i don't think it gives me any tax advantages).
posted by lgyre at 7:43 PM on April 3, 2007

There's less paperwork I believe with an S-corp.

Definitely get a CPA/attorney.
posted by debit at 7:44 PM on April 3, 2007

errr...I meant LLC.
posted by debit at 7:46 PM on April 3, 2007

What tax incentives do you mean? Both LLCs and S corporations are taxed as pass-through entities, so if you're the sole owner of an LLC and the LLC earns a buck, you have to include a buck in your taxable income.
posted by Mr. President Dr. Steve Elvis America at 7:49 PM on April 3, 2007

I chose to set up LLCs for my two businesses. The first time I did it I hired an attorney. The second time I did it I just went through my Secretary of State's web site and was able to set it up in less than an hour.

One business is an investment property firm and the other one is a candle manufacturing company. I have had no problems with the LLCs on either one of them.

I DO hire a professional to do my taxes, though, and keep separate business accounts under the name of the LLCs.
posted by Ostara at 7:50 PM on April 3, 2007

If all you want is simple taxes, the simplest is a sole proprietorship. All you have to do is fill out a Schedule C on your current 1040. It's probably a good idea to have a separate checking account and credit card for your business, but even that isn't absolutely necessary if you keep good records. This would be no different than you are probably doing now except that your W2 income would decrease and your Schedule C income would increase.

A single member LLC can provide you some protection against lawsuits, but unless you are running up big business debts or credit accounts, it is unlikely to be necessary. As a small business owner you are likely to have to personally secure any business loans anyway.

An S-corp is probably overkill and more expensive unless you expect to be earning much more money than you need to live on and wish to retain that money in the corporation.

You can probably just start out as a sole proprietorship and then decide later if you need to do an LLC.
posted by JackFlash at 7:53 PM on April 3, 2007

First off, I am a lawyer, but I'm not your lawyer. Any information contained in this post relating to tax treatment is not tax advice and may not be relied upon by any direct or indirect recipient for the avoidance of penalties.

I don't think you'll realize any tax benefit from taking a corporate form (i.e., anything you could deduct through an entity should be currently deductible to you now) and it could complicate the your tax filings (i.e., unless you choose a single member LLC, the entity will be required to file its own tax return which will then filter through to your personal return). If you truly don't need liability protection, I think staying as a sole proprietorship may be your best bet.

If you're looking for more on the issue of S corp vs LLC, see my comment in a similar question from a few days ago. Short version, unless you're in a state that disfavors LLCs, there is no reason to ever choose an S corp.
posted by dbolll at 7:54 PM on April 3, 2007

Yeah, I should add a little to my initial post. We haven't really seen much tax benefit from going LLC, and in reality the reason for going this route at at all was so I could hire a particular person so they could receive a legal and valid monthly paystub which was needed for secondary purposes. If you are going to make the choice between LLC and S corp, go LLC. But, from what you say I'd just stay the way you are, I don't see why you should change.
posted by edgeways at 8:22 PM on April 3, 2007

I'm already filing a schedule C and depreciating equipment. Would an LLC simply offer liability protection and not much else?
posted by photoslob at 8:26 PM on April 3, 2007

I am not a lawyer.

I have a friend who has an S-Corp. Doing everything by the book, he pays closer to 20% in taxes per year than the 40% that might be expected.

One strategy that will save you quite a bit, while screwing you if you're not a saver: This friend pays himself a salary of $1000 a month. That means that his Social Security withholdings are levied at 15% against $12K rather than 15% against his gross. Mind, the disadvantage is that when it comes time to collect Social Security, he will only be able to draw based on his contributions. Mind, he can take that same money and invest it however he wants.

If he grosses $100K, that alone saves him $13,000 a year in taxes (roughly, without looking at tax tables and the like). He pays himself through draws which are taxed as income, but that you don't pay SS against.

You also want to (legitimately) spend as much as possible through the corporation or llc. Running a small business is as much about wisely spending money as it is earning it.

Finally, I've had a (shady) accountant tell me that he loves S-Corps because they're rarely audited. Note "rarely" not "never." This is because the filings are relatively complicated and the IRS manpower just isn't there.
posted by maxwelton at 9:21 PM on April 3, 2007

Please don't take anything I said without proper counsel, of course. You can ask any of my friends: I am not proper counsel.
posted by maxwelton at 9:23 PM on April 3, 2007

A lawyer has told me that setting up an LLC to protect assets will not work out very well as any decent lawyer will see right through it and nail me anyway.

I've remained a sole proprietor for several years and it's been fine.
posted by drstein at 9:25 PM on April 3, 2007

max - no worries. like I said, I'm just looking to educate myself before I go to a lawyer/ cpa.
posted by photoslob at 9:26 PM on April 3, 2007

Since education is what you're after at this stage, don't forget to check the excellent books of Nolo Press.
posted by nakedcodemonkey at 10:25 PM on April 3, 2007

Be very careful of the advice given by maxwelton. The IRS does not look kindly on S corps that that distribute money through draws to avoid the payroll tax. The IRS requires a "reasonable" salary. I doubt that you could argue that $12,000 is a reasonable full time salary for a photographer. If caught, you would be responsible for all back taxes and penalties.

There are no hard rules but many accountants use the 60/40 rule. Payroll wages should be 60% and distributions 40%. Other accountants advise at least paying wages up to the $95,000 maximum for Social Security. Beyond that you still save the 1.45% for Medicare, which has no wage cap.
posted by JackFlash at 11:29 PM on April 3, 2007

FWIW, I have an S-Corp and an LLC. S-Corp was formed on the advice of my accountant (vs. LLC). Looking back that might have been because he needs to file a separate return for the S-Corp and charge me for it. As others have said, single-person LLC does not get a tax return but seems to get the same "benefits" as the S-Corp.
posted by toomuch at 9:28 AM on April 4, 2007