LLC or S-Corp

johu

I`m a college student, and I`ve been running an online advertising business for the past year as a sole proprietorship, but am bringing on a partner.  My tax accountant recommended setting up an LLC taxed as a partnership, but I`m also considering the benefits of an S-Corp, or even an LLC taxed as an S-Corp.
Could anyone explain the tax difference (as well as any other financial difference) between an S-Corp, and an LLC taxed like an S-Corp?  Also, this business is a part time job, so if it were set up as an S-Corp, would the wages paid to the partners be able to be counted based on the part-time nature, or would the IRS flag that as suspect, and increase the salary amount to a full-time basis (which would most likely eliminate all tax benefit as an s-corp vs. LLC).
Thanks!

johu

I should also mention that this will be formed in NJ.  Thanks again.

johu

Last note to add, but my partner and I want to get business credit cards to more easily manage the finances of the company.  Pretty much 99.99% of our expenses are paid by credit card, so if one structure is more beneficial to getting business credit, that would help, as well.

PiperTax

There are no Federal income tax differences between an actual S-corp and an LLC electing to be taxed as an S-corp.
My thoughts on the LLC vs S-Corp decision can be found here on my site.

johu

For the "reasonable salary" part of the s-corp, if it`s a part time job, would it be appropriate to only list a part-time salary, or does the IRS pretty much force you to use comparable salaries based on full-time work?

StartupLawGuy

By in large, the practical differences for your everyday, run of the mill small business between an S-Corp and an LLC are minimal at best.  Many times people think they can get away from paying employment taxes by going the S-Corp route, but that`s a very bad idea. 

BlueSage

Being an LLC, I will make an S election next year. Your best bet is to read the IRS site. S election means you pay taxes on the money you make as a salary, and expenses for everything associated with that salary are write offs, but the money left over at the end is not taxed. Reasonable salary means average salary for your type of business.

PiperTax

Many times people think they can get away from paying employment taxes by going the S-Corp route, but that`s a very bad idea. 
I`m curious. Why do you say that forming an S-Corp to save on SE Tax is a bad idea?
[Please note: I`m not trying to start an argument here. Just posing a respectful question.]
 

StartupLawGuy

My only point is that people start an S Corp thinking they`ll get away from paying all SE tax.  I agree, the possibility to pay less SE tax in an S Corp is there, but sometimes people try to avoid it all together by using an S Corp and then IRS comes in with its re-classification magic wand...the tax, interest and penalties later and the business owner wishes he had paid them in the first place.
 
Plus, IRS is starting to look at employment taxes harder as a way to reduce the tax gap.

PiperTax

Agreed, sometimes people get rather aggressive with their definitions of "reasonable salary." And it sure does cause (huge) problems down the line.Thanks for the reply, SLG.  (I`m actually currently writing a book on the topic of entity selection, so hearing other professionals` opinions/thoughts is quite welcome.)

infinique1

LLC might be a more convenient structure in the long run for your business.