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​​TAX & ACCOUNTING SERVICES FOR INDIVIDUALS & SMALL BUSINESSES​

CONSIDERING AN LLC OR S-CORP? HERE’S WHAT YOU NEED TO KNOW FIRST

So you started a business. Congratulations! Then you saw something on TikTok that promised to save you a ton on taxes: make your business an LLC (or S-Corp)!

First off, they aren’t the same thing. An LLC is a state entity and doesn’t have a clear tax classification. An LLC is not a tax structure by itself. It can be taxed as 1) a sole proprietorship, 2) a partnership, or 3) an S-Corp—depending on # of owners and the forms you fill out.

​That structure / tax classification MIGHT be a great idea for you. But before you do that, let’s talk about the extra costs you’ll incur in order to (try to) save on taxes:

  1. In our lovely state of California, each LLC / S Corp pays an annual $800 franchise tax to California in addition to income tax.
  2. ​S Corp owners are required to be on payroll, so you now will have monthly payroll processing fees, payroll & unemployment taxes, and worker’s comp insurance.
  3. You get a lower QBI (qualified business income) deduction on your personal returns as an S Corp

Contrary to TikTok, you cannot call your personal life your business and write those things off just because of an LLC or S-Corp. That’s tax fraud.
There are tax advantages to S-Corps (PTET – pass-through entity tax and FICA/self-employment tax savings), but those usually don’t outweigh losing that QBI deduction above, until your business is showing mid-five-figure profits. 
Also, if you are married, in community property states, the non-owner spouse must sign the 2553 S-election form as an X% owner. Even if it’s 0%, the spouse must sign.

Consult a CPA to further explore whether an LLC or S-Corp is right for your business. You can book a Tax Planning Session with me here.