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Sole Proprietor vs LLC vs S Corp: Which Entity is BEST for Business Taxes?

Jun 02, 2021
Which

business

entity

will save you more money on your

taxes

: a

sole

proprietor

ship LLC S

corp

oration or a C

corp

oration. Now your tax expenses can vary greatly depending on the

entity

you select here and by a lot I mean thousands, if not tens of thousands of dollars. By the end of this video I hope you are saving thousands and not paying thousands more than necessary in

taxes

. My name is Sherman. I am a certified public accountant here at Life Accounting, where we help companies manage money and save money in their

business

es today I am going to help you select the

best

entity for your business.
sole proprietor vs llc vs s corp which entity is best for business taxes
This information is information we typically charge for as part of our tax planning service, but today you can get this information completely free and get more free content to help you. save more money in your business, make sure to like this video and subscribe to our channel. With that said, let's get started when it comes to entity selection, there are types of legal entities and types of tax entities, a legal entity is an entity that you register with your state and your tax entity is the entity that you choose to file with the IRS, for example, may register your business as an LLC in your state for legal purposes, but in the meantime, you may choose to pay taxes as an S-Corp with the IRS for tax purposes.
sole proprietor vs llc vs s corp which entity is best for business taxes

More Interesting Facts About,

sole proprietor vs llc vs s corp which entity is best for business taxes...

For legal entities there is no S-Corp, we will discuss this on each type of entity in a moment, but before we do this it is important that you understand the taxes involved for all entities, so let's talk about transfers. Through Entities The first thing you need to understand about entity taxes is the pass-through tax to

sole

proprietor

ships, LLCs and S corporations are taxed as pass-through entities, this means that all income your business receives pass to you personally for tax purposes, for example if your business made 100,000 and you owned 100 of that business then you will be required to pay tax on that 100,000 individually not as a business, the exact tax you pay will depend whatever tax bracket your total personal income is in and then there is something called double taxation, only c corporations are subject to double taxation.
sole proprietor vs llc vs s corp which entity is best for business taxes
Double taxation is when the company itself pays taxes on all of its profits before payments are made to the owners and when those payments are made to the owners, the owners then pay taxes on the payments it receives from the corporation, so who pays two taxes due to double taxation. C corporations are not the most popular choice among small businesses, so let's look at an important tax that most small businesses face as pass-through entities and that is the self-employment tax. The employment tax is currently an additional 15.3 percent tax on your income. It's basically how the government funds programs like Social Security and Medicare,

which

is typically deducted from your paycheck as an employee.
sole proprietor vs llc vs s corp which entity is best for business taxes
The only difference is that, as a business owner, you pay both the employer's portion. and the employee portion of the tax equals a total tax of 15.3 percent. Here's what you need to know about self-employment tax. The self-employment tax does not currently apply to S or C corporations and because C corporations are subject to double taxation and S corporations are not, it sheds light on S corporations as a good entity option. To save on these types of taxes, still, S corporations are subject to a few different rules that can complicate this, so let's look at each entity closely so you can determine

which

one makes the most sense for your business, the number one sole proprietorships in general partnerships, if you don't register your business with your state, then you are a sole proprietor by default, for example, if you wake up tomorrow and start mowing people's lawns in exchange for money. then you will be doing business as a sole proprietorship and if you and your friend decide to work together to do this then you will be a general partnership, sole proprietors and partnerships pay the same taxes, they just make mistakes in different places on their tax return.
Owners report their business income on their individual or 1040 tax return and use Schedule C to report business income or losses from their business partnerships. They report business income on their partnership tax return or 1065. Each partner must receive a k1 which basically tells you how much of the profits they are entitled to both entities can deduct business expenses to reduce their income you can deduct things like your advertising expenses automobile expenses office expenses and much more on your return now the main taxes to which you are subject are the federal income tax state income tax and the self-employment tax on the legal side what The least attractive thing about sole proprietors and partnerships is that they carry substantial risk.
The biggest legal risk is that you have no protection for your assets. For example, if you accidentally set fire to your client's house, then you would be personally liable for all costs. damages, meaning if they sued you they could go after everything you own to prevent this. Most people decide to organize as an LLC, so let's talk about it, number two, a limited liability company. or llc does exactly what its name says, it limits your liability to your business by default, there is no additional tax benefit to registering your business as an llc, it simply protects you, so in the same example if you accidentally set fire to your client's house, then you will not be personally liable if you were sued, only your company will be responsible, which means your loss will not exceed the amount you have invested in your company, for this reason, LLC is one of the types of most popular entities among small businesses and provides strong protection. and they are very easy to set up now on the tax side, the forms you file are different depending on whether you are a single member llc or a multi member llc.
Single member LLCs file their taxes on a schedule c, just like sole proprietors and multiple -Member LLCs file their taxes on a 1065 just like partners. Now here's the interesting thing, since an LLC can choose to fail as an S corporation for tax purposes, this would allow you to take advantage of the tax benefits of an S corporation without having to form a corporation, so number three, let's talk about corporations. guys. Entity must have a legal entity to elect S-Corp status, for example, LLCs NC corporations can elect to be treated as an S-Corporation for tax purposes. You must be a domestic corporation with no more than 100 shareholders to be eligible for S-Corporation status and to elect S-Corp status you must file a Form 2253 with the IRS, if they accept you then you would file a 1120 as an S-Corporation. on your tax return, this means you would not be required to pay for self-employment.
Taxes, this is great, but there is one important rule: Corporation owners must pay themselves what is called a reasonable salary for the work they do in their business before receiving profit distributions. This reasonable salary should be paid as you would pay a w2 employee. which also means that you are still paying Social Security and Medicare taxes to some extent. In order to do this, you must first set up a payroll system to pay yourself and file quarterly payroll taxes and you must also figure out how to pay yourself a reasonable amount. Salary Now The IRS provides some factors for you to consider, such as your training and experience or what you would pay a non-shareholder employee to do the same job, but the answer can still be a little confusing and if you get it wrong, the IRS You can go back and reclassify the payments listed as distributions as w2 wages that you then have to pay taxes on, now this clearly intimidates many business owners, but according to many cpas, I know the unofficial rule they follow is that a reasonable salary to pay yourself to yourself is equivalent to about a third of the business's profits, so as long as you do this as an s-corp I'd say you should be fine, a lot of people who are getting stuck with the IRS apparently don't pay themselves any wages. themselves.
Not at all, here's the good news: by setting a reasonable salary, you effectively limit your exposure to self-employment taxes. For example, let's say you earned a hundred thousand dollars of income and paid yourself seventy thousand dollars as a reasonable salary. In that case, I only pay social security and Medicare taxes on the seventy thousand dollars and I would not pay them on the difference of thirty thousand dollars and for you, the mathematical numbers that there are thirty thousand dollars multiplied by fifteen percent equals forty Five hundred dollars, that's forty five hundred dollars in tax savings. just choosing the right entity, anyway, which entity is

best

for you, ultimately the best entity for you will depend on where you are in your business, but here are some very general recommendations that I can give you when you are just starting out , consider starting as an LLC, it is very easy to set up and will give you limited liability for your business once you start earning over fifty thousand dollars per year in business income, then you may want to consider choosing S corporation status, This will limit your exposure to yourself. -employment taxes as you continue to grow your business, well done friends, I hope that helped you.
That's all for today's episode and if this video helped you, please let me know by hitting the Like button below. See you in the next episode.

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