C Corp v S Corp v LLC


D

DazedAndConfused

My nickname says it all - I'm trying to figure out the best
form of organization for a business and my head is swimming.
Any advice or pointers could be greatly appreciated. I'd
also like to talk to a professional expert on this, I don't
think my CPA is well enough versed in this type of thinking
for me to be fully confident in him. Here is the situation:

Business Description
* Provides web development services - designing, building,
and marketing websites and web applications;
* 2005 revenues $200K, almost exclusively from services
* Located in CT
* Right now organized as a single-member LLC; considering
switching to an S corp or C corp, and even if we stay as an
LLC want to determine the best way to structure a gradual
acquisition of equity by a second member over 5 years that
minimizes tax consequences; physical assets are limited, and
setting up a new LLC would be possible;
* One main employee in the US who would be getting equity
starting Jan 1 2006, along with several overseas
employees/contractors and some US based freelancers;
* In the future we expect about 25% of revenues to be spent
on production (paying the overseas employees), 10% on
overhead/marketing, leaving about 65% to compensate the two
owner/operators; that 65% will probably drop as revenues
rise due to middle management required, but long run will be
at least 50%
* We expect the revenues to grow rapidly, 30 - 100% a year
over the next 5 years
* I'm 27, the employee who would be coming on as a partner
is 39; neither of us has a house, wife, or children, and
both are interested in piling up lots of retirement assets;
we get along well and have some ideas for spin off
businesses, or may be interested in coinvesting in real
estate or stocks;

* Question is - C or S or LLC
- C advantages: easier to give large tax deductible
benefits - life, medical, retirement, etc.; corp tax rates
low on the first $100K of profits each year, which would
allow us to pile up cash inside the company for investment
without high personal income and SE taxes on it; for
foreseeable future double taxation could be avoided on
profits of over $100K/year by a combination of
salary/bonuses/benefits
- S advantages: at larger profit amounts (say at 2+ mill of
revenues and 1+ mill of profits) we won't be able to avoid
double taxation on the profits with a C because we would be
capped on what could reasonably be given as salary and
benefits; with 15% dividend taxation the total marginal C
corp rate comes out to about 52% (State and Fed corp tax +
dividend tax), whereas the S is more like 42% (State and Fed
income + medicare)
- LLC advantages: flexibility and all that, but tax wise
appears to be inferior to S corp due to extra SE taxes paid
with no tax advantages

I'm leaning towards a C corp right now. We can avoid a high
marginal double taxation rate for a long time and in the
present our benefits will be fully deductible leaving us
better off than a S corp. Also compiling money inside the
company to fund growth and investment is much cheaper than
with an S.

Thoughts?

DF
 
Last edited by a moderator:
Ad

Advertisements

S

Stuart A. Bronstein

DazedAndConfused said:
My nickname says it all - I'm trying to figure out the best
form of organization for a business and my head is swimming.
Any advice or pointers could be greatly appreciated. I'd
also like to talk to a professional expert on this, I don't
think my CPA is well enough versed in this type of thinking
for me to be fully confident in him.
Unfortunately your CPA is the best one in a position to
advise you. So if yours can't help, find one who can.

Briefly, a C corp is taxed as a separate entity. When it
pays you salary it gets to deduct what it pays and you
recognize it as income. In most small corporations most if
not all the taxable income is paid out to the owners as
salary and bonus, so that it doesn't have taxable income.

There are some things (but not many) you can deduct with a
corporation that you can't otherwise. For example a
corporation can deduct charitable contributions but an
individual can't on a schedule C. One of the disadvantages
of a corporation is that, if it holds depreciable property
and otherwise has no taxable income, the depreciation
deductions may be wasted.

An S corp is generally taxed as if it didn't exist. However
losses can't be deducted in excess of your basis in the
corporate stock. So if you have highly levereged real
estate you might lose out on some of the depreciation
deduction.

An LLC is not a recognized entity for tax purposes. The IRS
allows you to elect how it will be taxed, so it can be taxed
as a proprietorship or partnership, a C corporation or an S
corporation.

Stu
 
Last edited by a moderator:
E

effi

DazedAndConfused said:
My nickname says it all - I'm trying to figure out the best
form of organization for a business and my head is swimming.
Any advice or pointers could be greatly appreciated. I'd
also like to talk to a professional expert on this, I don't
think my CPA is well enough versed in this type of thinking
for me to be fully confident in him. Here is the situation:

Business Description
* Provides web development services - designing, building,
and marketing websites and web applications;
* 2005 revenues $200K, almost exclusively from services
* Located in CT
* Right now organized as a single-member LLC; considering
switching to an S corp or C corp, and even if we stay as an
LLC want to determine the best way to structure a gradual
acquisition of equity by a second member over 5 years that
minimizes tax consequences; physical assets are limited, and
setting up a new LLC would be possible;
* One main employee in the US who would be getting equity
starting Jan 1 2006, along with several overseas
employees/contractors and some US based freelancers;
* In the future we expect about 25% of revenues to be spent
on production (paying the overseas employees), 10% on
overhead/marketing, leaving about 65% to compensate the two
owner/operators; that 65% will probably drop as revenues
rise due to middle management required, but long run will be
at least 50%
* We expect the revenues to grow rapidly, 30 - 100% a year
over the next 5 years
* I'm 27, the employee who would be coming on as a partner
is 39; neither of us has a house, wife, or children, and
both are interested in piling up lots of retirement assets;
we get along well and have some ideas for spin off
businesses, or may be interested in coinvesting in real
estate or stocks;

* Question is - C or S or LLC
- C advantages: easier to give large tax deductible
benefits - life, medical, retirement, etc.; corp tax rates
low on the first $100K of profits each year, which would
allow us to pile up cash inside the company for investment
without high personal income and SE taxes on it; for
foreseeable future double taxation could be avoided on
profits of over $100K/year by a combination of
salary/bonuses/benefits
- S advantages: at larger profit amounts (say at 2+ mill of
revenues and 1+ mill of profits) we won't be able to avoid
double taxation on the profits with a C because we would be
capped on what could reasonably be given as salary and
benefits; with 15% dividend taxation the total marginal C
corp rate comes out to about 52% (State and Fed corp tax +
dividend tax), whereas the S is more like 42% (State and Fed
income + medicare)
- LLC advantages: flexibility and all that, but tax wise
appears to be inferior to S corp due to extra SE taxes paid
with no tax advantages

I'm leaning towards a C corp right now. We can avoid a high
marginal double taxation rate for a long time and in the
present our benefits will be fully deductible leaving us
better off than a S corp. Also compiling money inside the
company to fund growth and investment is much cheaper than
with an S.

your situation raises legal (liability, etc.) issues as well
as taxation and reporting issues

arguments can be made in favor of any type of business
entity without knowing all the facts

consider engaging a professional, well versed in liability
and other legal issues, as well as taxation and reporting
issues

who knows, with all the reporting and other issues as to
corps and LLCs, and the ability of skilled attorneys to
pierce corporate veils and extend liability to owners, you
might be better off as a sole proprietorship

have seen horror stories where years after being advised as
to the type of business entity to operate out of, the
owner(s) realize they totally screwed up on the front end by
not learning, upon starting the business, what they needed
to know as to entity choice, relying on tax return preparers
for their advice, who knew nothing of liability etc. issues

so recommend follow current path and learn as much as you
need to know to make an informed decision, even if it means
hiring a professional
 
Last edited by a moderator:
Ad

Advertisements

M

Mark Rigotti

You've already gotten a couple of good replies, However I
think that there is a more important issue here. I
generally do not make the following recommendation lightly
but if you feel uncomfortable with your CPA I believe that
it is time to find another.

Regards,

Mark
 
Last edited by a moderator:

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Similar Threads

C corp v S corp 3
USA S corp shareholder basis 0
USA S corp shareholder basis calculation 0
S Corp Membership in an LLC/C Corp 1
LLC & S Corp 5
USA S Corp becoming C Corp 0
Changing a c corp to an s corp 5
USA S Corp Becoming C Corp 1

Top