USA New business S-corp or LLC?

[musicman57]

Hi
I'm interested in beginning a music instruction business, and was told to incorporate and elect to be taxed as an S corp. I'm only 1 person right now.I would be taking care of all the billing; scheduling; advertising for a fee having teachers working as subcontractors. I was wondering if setting up my business as a corporation then electing to be taxed as an
S-Corp would be the way to go with my type of business tax wise? Or perhaps an LLC?
Thanks for your time.

 

[Samir]

A S-corp and single member LLC are usually both taxed as a pass-through entity. This means that your business net profit/loss comes to your personal tax return as income/loss to increase/offset your personal income. But you will probably also have to pay self-employment tax on this amount, so that's something to consider as well.

 

[ColinCPA]

I would consider getting professional assistance with business structure selection, as there could be numerous implications depending on your situation. Sometimes attorneys are better equipped to advise on and set up business structures.

How much income do you expect? The main benefit of an S-corporation is the potential to save on FICA and Medicare taxes in the form of non-taxable dividends. However, this comes with risk, as corporate shareholders are considered "employees" as well as owners, and must designate suitable wages. This increases the burden of filing, as payroll taxes need to be filed, and in most states, state unemployment taxes need to be paid for an accounted for. Penalties for not keeping up with this properly are significant and in some cases, devastate a business.

There could also be numerous other issues to consider, such as, but not limited to: increased scrutiny over contractor vs. employee status, inflexibility as to ownership, requirements for board meeting and minutes, inability to do Section 754 step-up elections, shareholder basis consequences upon disposition of ownership, and more.

An LLC is a lot easier to manage, and could likely be the way to go if significant tax savings are not realized in a S-corporation, and you have no need for the unique protections of the corporate form of business.

 

[Samir]

From my understanding, I thought minutes and a yearly meeting were part of the requirements for an LLC as well. It's probably not enforced, but I recall it being a requirement in the early days of LLCs.

 

[ColinCPA]

From my understanding, I thought minutes and a yearly meeting were part of the requirements for an LLC as well. It's probably not enforced, but I recall it being a requirement in the early days of LLCs.

Only if the operating agreement includes a clause to hold such meetings and/or minutes. Otherwise, it's not required.

 

[Samir]

Only if the operating agreement includes a clause to hold such meetings and/or minutes. Otherwise, it's not required.

Interesting. Looks like that requirement has changed.