I am a CPA that specializes in tax. My practice is an LLC that has an S-corporation election. I disagree with most of what has already been posted.
Before selecting the form of business, you should consider the advantages and disadvantages. I like the LLC form because you get the limited liability of a corporation without having to jump through hoops--having mandatory annual shareholder and board meetings, keeping minutes, etc.
Personally, I think that any business should have a good business attorney and CPA from the start. These are invaluable relationships that will (hopefully) keep you out of both legal and financial trouble.
I have to respectfully disagree with the prior post. Under the IRS "check-the-box rules" effective beginning in 1997, a single-member LLC is disregarded as an entity separate from its owner unless the LLC makes an election to be treated as a corporation.
For an LLC to become an S-Corporation, there are two forms that must be filed: Form 8832, Entity Classification Election, and Form 2553, Election by a Small Business Corporations. The forms can be filed simultaneously.
As as a member of an LLC treated as an S-corporation, you are considered an officer of the corporation for federal tax purposes. Accordingly, you are required to take a reasonable compensation (salary). A reasonable compensation is based on what a person similarly situated would be paid. The IRS is generally flexible for the first few years provided there is a plan in place to pay above reasonable compensation to make up for it in future years.
The beauty of an LLC being treated as an S-corporation is that once you are profitable, the taxable income passes through to you free of payroll taxes (Social Security, Medicare, and unemployment) and there is no double taxation of dividends.
Estimated tax payments generally only need to be made if you were already making estimated tax payments or if you owed at least $1,000 with last year`s tax return. The safe harbor is that you must have at least 90% of your prior year`s tax liability withheld from paychecks or paid through estimated payments or 90% of the current year tax liability (under legislation just signed by the President), whichever is less. It`s typically less burdensome to just have additional tax withheld from your paycheck (complete Form W-4).
Michael W. Crosby, CPA