Thread: LLC v S Corp Excel Compared

Example of Camtasia Screen Capture Tutorial Ability:

Exhibit:
S-Corp
v
LLC Tax & Regulatory Attributes

Note: LLC Members Self Employment Tax (SET) Exempt. Zahid & Helse Fight Night 1 will discuss the disputed exemption
at IRC sec. 1402(a)(13) pertaining to limited partners and LLC Members.

[ame="http://www.youtube.com/watch?v=s26XTxsCh28"]YouTube - LLC v S Corp Excel Compared[/ame]

I am impressed with camtasia, so when do we start the fight? lol

I stole this from a website:

Profits of the S-Corp which pass through to the shareholders are not subject to self-employment tax (Social Security and Medicare which is approximately 15%). Rather, self-employment is only taxed on the portion classified as a "reasonable salary". LLCs and sole-proprietorships must pay self-employment tax on all income. The ability to minimize self-employment tax is deemed to be one of the greatest benefits of a s-corporation.

Interesting

UCLA LR (2008) Re IRC 1402(a)(13)

Tax Watch
LLC Self-Employment Regulations Can Be Taxing

By Steven M. Friedman and Samuel H. Hoppe


LLC Members IRC 1402 & SET Dilemma
Distinguishing LLC Members Qualified as Limited Partners vs. General Partners Subject to SET

Section 1402(a) generally defines net earnings from self-employment for
purposes of determining a tax base to which self-employment taxes will be
applied. Specifically, net earnings for self-employment include the distributive
share of income or loss from any trade or business carried on by a partnership.

However, Section 1402(a)(13) provides an exception, stating that the distributive
shares of income or loss of limited partners, other than guaranteed payments,
will be excluded from net earnings from self-employment income. Accordingly,
limited partners or members of a partnership or LLC are exempt from paying
self-employment taxes on their distributive share of income or loss. The issue — and
the controversy among taxpayers over who is liable for self-employment taxes — stems
from how the statute defines a limited partner for purposes of determining net
earnings from self-employment.

Limited Partner Defined
The definition of a limited partner has narrowed in recent years, ultimately making
it more difficult for LLC members to qualify for the limited partner exception of
Section 1402(a)(13). For example, Section 1402 regulations that were proposed in
1994 — but never were finalized — made a distinction between individuals owning
an interest in limited partnerships and those owning interests in LLCs. Specifically,
under the 1994 regulations, a taxpayer owning an interest in an LLC was treated
as a limited partner if the individual did not make management decisions concerning
the LLC’s business; the LLC could have been formed as a limited partnership in
the same jurisdiction; and the member could have qualified as a limited partner in
the limited partnership.


http://www.ciremagazine.com/article.php?article_id=464

Fight Night 1 Topic:

Dilemma: Treasury proposed a modification to IRC 1402(a)(13), the
500 hour test for Limited Partners and S.E.T. Congress enacted legislation
specifically designed to thwart, not toll, the Treasury Regulation, yet, a portion
of tax academics allude to the PROPOSED REGULATION as governing.

Remember, the Proposed Reg is not law. Congress (Newt's committee) passed
a law prohibiting enforcement of the Treasury Department's proposed 500 hour
test in 1998.

2006:

Zahid owns a bookkeeping service. In keeping with the industry standard, Zahid decides that a reasonable salary for an accounting manager is $35,000 and pays himself accordingly. Zahid's total earnings for the year are $60,000; $35,000 paid in salary and the remaining $25,000 paid as a distribution from the S corp. Zahid's total employment tax is $5,355 (15.3% of $35,000).

If Zahid were the owner of an LLC, he would have to pay employment tax on the entire $60,000, equaling $9,180. But as an S corporation, he realizes savings of $3,825 in employment tax.

ahem! ahem!

From a tax perspective, corporations (specifically S-Corps) provide more benefits than an LLC. Of course an LLC is flexible with taxation.

Let's compare a company that has net income (income - expenses) of $75,000. We'll assume this is before any salary, and that the owner would like to take a $35,000 salary. Under this scenario, about $4,700 savings could be yielded with an S-Corp.

LLC
Net Income Before Salary -- $75,000
Less Reasonable Salary -- $0
Income After Salary -- $75,000
Employment Taxes (15.3%) -- $11,475
Income Taxes (25%) -- $11,000 (estimated and rounded)
Total Taxes Paid -- $22,475

With an LLC, it is disregarded as an entity and a salary cannot be taken. This is because the LLC is treated as a sole proprietorship. So all $75,000 of the company's profits are subject to employment taxes. The good news is that all of the company's profits may now be withdrawn as taxes have been paid.

S-Corp
Net Income Before Salary -- $75,000
Less Reasonable Salary -- $35,000
Income After Salary -- $40,000
Employment Taxes (15.3%) -- $5,355
Income Taxes (25%) -- $12,400 (estimated and rounded)
Total Taxes Paid -- $17,755

With the S-Corp, we assume that a $35,000 salary is reasonable. Employment taxes only need to be paid on that portion. Income tax will be paid on the $75,000 either through your W-2, or when it passes through from your 1120S to 1040 Schedule E. The only reason why you pay more income tax as an S-Corp over an LLC is because they get a credit for one-half of self-employment, but the business gets an expense on their tax return. The benefit now is that the remaining $40,000 can be declared as a "dividend" (distribution), and you won't pay any further tax on it.

The numbers I've crunched aren't perfect, as there are lot of variables involved. But there can be considerable savings with an S-Corp over an LLC.

Reasonable Salary is an S-Corp concept foriegn to partnership and LLC planning. The
S-Corp is subject to: Regs. Sec. 31.3121(d)-1(b), officers are considered employees of a corporation
when they provide substantial services to a corporation.

Members of LLC are not subject to "Reasonable Salary" regulations.
"Employees" of an LLC, are not owners of an LLC. A corporation is a separate person at law (corpus personae),
an LLC is treated as a separate person for purposes of registering titles, pleading and owning land. Historically,
partnerships were denomed aggregations, not entities separate from the owners. Ergo, an
LLC member is not an employee and not subject to statutory reasonable compensation requirements.

Conclusion:
LLCs are immune from S-Corp reasonable salary requirements. LLC Managers may distribute 100%
of profits as 1065 K-1 Distributable Net Income (DNI). The history of Limited Partnerships in
the U.S.A. indicates limited partners may select employee status for purposes of Social Security contributions
(qualification regulations) and/or workers compensation and medical insurance.

Tax Watch
LLC Self-Employment Regulations Can Be Taxing

By Steven M. Friedman and Samuel H. Hoppe

LLC Members IRC 1402 & SET Dilemma
Distinguishing LLC Members Qualified as Limited Partners vs. General Partners Subject to SET


"However, Section 1402(a)(13) provides an exception, stating that the distributive
shares of income or loss of limited partners, other than guaranteed payments,
will be excluded from net earnings from self-employment income. Accordingly,
limited partners or members of a partnership or LLC are exempt from paying
self-employment taxes on their distributive share of income or loss [emphasis added].
The issue — and the controversy among taxpayers over who is liable for self-employment
taxes — stems from how the statute defines a limited partner for purposes of determining net
earnings from self-employment." Commercial Real Estate Investment Tax Watch


http://www.accountingblock.com/news/....html#post1484

Limited Liability Companies
by Thomas A. Humphreys

LLC Members Managerial Rights = General Partner Taxation Classification = Self Employment Tax
LLC Members Nonmanagerial Rights = Limited Partner Taxation Classification = Nonself Employment Tax
IRC 1402(a)(13)




http://books.google.com/books?id=Ez_...um=4#PPT284,M1