Forums: Discussions for entrepreneurs and small business.

I am looking to form a company and like a lot of ppl am trying to decide between an LLC and s-corp. I am based in NYC and i would be the sole person in the company to start off with. Estimated gross profits of hopefully $100-$200k. I have researched ad-nauseum about the differences between an LLC and s corp and from what i have found it seems at the end of the day for my purposes that an LLC has a slight advantage over an s corp due to less annual requirements such as payroll taxes etx.. which would lead to payer lower taxes as well as not having to file corporate tax return etc.. which would end up costing me anywhere from $500-$1000k per year less than if i went with an s corp.

The only major drawbacks i found with an LLC are firstly the higher setup cost of an LLC which requires you to publish your formation in two publications (~$1600) however this cost is offset over two yrs of paying lower annual fees. The other and more concerning disadvantage i have heard is that an LLC is A LOT more likely to be audited than an s corp when filing a schedule C especially when the company has gross profits in the $200k+ range.

My question finally is does it make sense to start the company as an LLC and than a few years down the road choose to be taxed as an s corp or should i just go with one or the other? Also can anyone tell what the major differences are between an LLC with s corp status vs straight s corp. Been hard to find anything concrete online?

thx

Since you’ve done a lot of your homework already, there is no need to go over the basics.

With regard to your payroll taxes, specifically, state and federal unemployment, yes, you will have to pay SUI and FUTA. On the flip side, as the sole LLC member, all income is considered ordinary income and subject to FICA and Medicare taxes (subject to income limits on FICA). With a Sub S, you take a reasonable salary and the balance can be declared as dividends (unfortunately there is nothing in the IRS literature or the Regs that gives a definitive answer as to what is reasonable). These dividends are subject to income tax but not payroll taxes.

The amount that you cite for publishing fees seems high. The county clerk’s office defines what constitutes a daily and a weekly paper that the legal notice has to be published in. There are many service companies in NY State that will do that for you, i.e., send the legal notice to the papers for publication. Once it runs they will then file the necessary forms, affidavits, etc. with the state. The total cost for that (classified ads and their fee) is usually a lot less than $1,600. The cost should be in the $300-$450 range (assuming that you do the leg work on the formation of the LLC yourself).

As far as the tax status, the IRS has no tax classification for an LLC per se.

• Single member LLC, you file a Schedule C as if you are a sole proprietor. The IRS considers this to be a disregarded entity.
• Multi-member LLC – will be treated as a partnership (Form 1065). If it is two people and the other member is a spouse, then it is a disregarded entity.
• Elect to be treated as a corporation (C corp or an S corp) – the returns to be filed will either be an 1120 (C corp) or 1120S (S corp).

The biggest difference between an LLC as an S corp and being an S Corp is the recordkeeping requirements, minutes of annual meetings, stock being issued, etc. At the state level, registration fees (both initial and annual) may differ for a LLC and an S corp.

If you would like to discuss this in more detail, don't hesitate to contact me.

In my experience, when the business profits (going towards the owner), reach $60K a year is when the administrative costs of an s corp are outweighed by the tax breaks you get (referenced in the previous answer). If it is worthwhile you can do so either by being an LLC and electing to be taxed as an s corp or a c corp elected to be taxed as an s corp.  Just note that the year in which you elect s corp status you must do so in a timely manner.