LLC? S-Corp? WTF?
So, you started a business? Kick-Ass!!! Now the fun begins. Do you incorporate? Form an LLC? Are you a sole proprietor? WHAT?!Here are a few of the basics…
If you are all by yourself in this little (or big) venture, you ARE a sole proprietor. But you have options…Forming an LLC is a good way for you to avoid personal liability. This way, if things go bad, only the business is liable for the debts and liabilities that the business incurs, not you personally. Cool right? Indeed.
Now, you can be an LLC that is (or is Not) an S-Corp. The S-Corp election is great because it can save you money in taxes. When you are a sole proprietor, with or without an LLC, ALL of the business income is subject to self-employment taxes. But, with the S-Corp election, you only have to pay self-employment taxes on the portion of income that you take home as PAYROLL. The rest is not!
Let’s say your business made $70K last year. As a regular LLC, you would pay self-employment taxes (Fed, SS, and Med) on all of it. However, if you elect to be taxed as an S-Corp, you could pay yourself a $30K salary, pay employment taxes only on that $30K and take the remaining $40K as distributions (not subject to employment taxes)
Who knew? Now YOU DO.