S Corp v. Sole Proprietorship - Tilted Forum Project Discussion Community

Meier_Link · 10-18-2005, 05:29 PM

I am going to open my own real estate firm in the very near future. I'm fairly indigent right now, and certainly can't afford to consult a tax attorney. Sole proprietorship sounds good, because it's easy to set up, and as a broker you are always personally liable for what you do anyway. A friend advised me that there might be some big tax advantages to starting an S Corp instead. He told me I wouldn't have to consult an attorney, and could set it up on the internet for as little as $125.

Looking for advice here.... Thanks for any suggestions.

Anxst · 10-19-2005, 04:42 AM

Do a little research into which would best fit your situation. When I last started a business, we chose to go with an LLC, which worked well for us. You may also want to look into that.

Meier_Link · 10-19-2005, 06:35 PM

Here's my understanding of the situation, thus far. It is by far incomplete, so please correct me if I'm wrong.

In a sole proprietorship, or LLC for that matter, when you pay taxes on your earnings, the entire amount is subject to employment tax, which includes MediCare and Social Security taxes. The advantage is that there are less restrictions and it is easier to file.

With a subchapter S corporation, you may pay yourself a standard salary for what you do, which is subject to employment tax, and take the rest of your earnings as dividends, which saves you the MediCare and Social Security taxes you would otherwise be subject to. The big disadvantage is that you have all the paperwork involved with a corporation, along with a lot of restrictions...

At this point I'm leaning toward the S Corp, if I can work my way through all the paperwork involved.

j8ear · 10-20-2005, 09:40 AM

I think you've outlined a pretty good understanding of the basic differences.

Regardless of your 'indigent' status, it would be a wise decision to involve a tax attorney in your decisions, as this person will probably save you substantially in the long run. As a corp. of any kind having an attorney/tax pro in your corner, is practically essentially to ensure you are compliant with and protected from the IRS, and other unsavory character's like them. Since I've starting using one, my books, my taxes, my reporting requirements, my refunds, everything has been far superior then his cost. It's almost a no brainer to me.

Think long and hard about going without.

What do other real estate agents do to set up their own firms?

Here's a brief primer on the various Delaware Incorporations from delaware intercorp...who I used to incorporate my LLC:

https://www.delawareintercorp.com/orderform.htm

-bear

Meier_Link · 10-20-2005, 11:57 AM

Quote:

Originally Posted by j8ear

As a corp. of any kind having an attorney/tax pro in your corner, is practically essentially to ensure you are compliant with and protected from the IRS, and other unsavory character's like them.

https://www.delawareintercorp.com/orderform.htm

-bear

You've got a good point, and when things start going well I will certainly shell out the money to hire one... As for now, I think I will just hope I don't screw it up too badly.

Elphaba · 10-20-2005, 01:21 PM

Our CPA set us up first as a sole proprietorship, followed by an S Corp when our revenue increased. We formed a partnership a few years ago that was best structured as an LLC.

For a variety of reasons, I think the S Corp is the best move for you. You're going to need a good CPA anyway, so choose one who can set up your business for you. It is sooo worth the money.

gar1976 · 10-20-2005, 07:00 PM

CPA here:

S corps require you to take a salary and file a separate return. If you chose to use a payroll service (highly recommended) the increase in costs to you will be around $2,000 or so (also recommend having a professional do your taxes).

Break-even for this is around $40,000 net income, assuming you're taking a salary of around $24,000 or so. Also, if you pay your health insurance for yourself and your family through the S Corp (allowed, fully deductible) it will be included on your W-2 as wages and "gross up" your officer compensation.

Your officer compensation is listed separately on the 1120s, and the IRS is starting to aggressively examine these. You are allowed a return on your investment in the form of net income, plus earnings on your employees and inventory. It's late and I'm rambling, so maybe something more coherent will come out tomorrow.

BCD · 10-21-2005, 11:28 AM

I promise that this is the best advice you will ever receive from a business lawyer who uses a picture of his boner for his avatar.

I typically advise small business clients to wait a year before starting an S corp. It doesn't make sense to incur the expense and headaches associated with S corp (adequately discussed above) right out of the gate, since it is not uncommon for a business to shut down within the first year or two or you end up not making enough 'jack' to benefit from the tax play that is available. Also, it is very important to note that the IRS knows this tax play is common and they are getting much more agressive at pursuing people who abuse this tax play. Given that you will be a service business and deriving almost all (if not all) of your income through your own efforts, it would be hard to justify this tax play if you were caught. This means penalties and interest.

Having said that, I typically recommend clients start out as a single-member LLC (vs. sole proprietorship) for the following reasons: (i) They are extremely cheap and easy to setup; (ii) they offer you the same sort of contract / tort protection you would have with an S corp; (iii) the separate entity gives your business more credibility; (iv) you are treated for federal income tax purposes (and often state income tax purposes) as if you were a sole proprietorship, which means your tax compliance expenses shouldn't be any greater than if you were a sole proprietor; and (v) it is easy to have the LLC taxed as an S corp down the road should your business prove viable and there is sufficient $ coming in to take advantage of the discussed tax play.

Meier_Link · 10-22-2005, 07:35 AM

Quote:

Originally Posted by BCD

I promise that this is the best advice you will ever receive from a business lawyer who uses a picture of his boner for his avatar.

It doesn't make sense to incur the expense and headaches associated with S corp (adequately discussed above) right out of the gate, since it is not uncommon for a business to shut down within the first year or two or you end up not making enough 'jack' to benefit from the tax play that is available.

My problem is... If I start out as an LLC that's probably what I'll remain. I'll have to go through all the crap with the Board of Realtors and the Real Estate Commission if I change my business type. Plus I was planning on using the S Corp to start several businesses over time, using assumed names. I can deal with the headaches, and I don't see the added expense; I will only hire a CPA if I've made enough money to worry about it, in which case I'll probably be benefitting from it.

BCD · 10-22-2005, 11:48 AM

Here's the thing you're missing. A single-member LLC can elect to be taxed as either an S corp or a sole proprietorship. Under my proposal your LLC starts off as being taxed as a sole proprietorship and later elects to be taxed as an S corp. For all other purposes, the LLC remains the same LLC (i.e., Meier_Link, LLC will still be Meier_Link, LLC - not Meier_Link, Inc. - after the change in tax classification) so you don't need to go back to the Board of Realtors or Real Estate Commission. An LLC can also adopt assumed names, so you can use it for different business ventures.

The extra expense that you don't see is that when you organize a single-member LLC, all you do is file basic Articles of Organization with your Secretary of State, register with you state's Dept. of Revenue, and sign a canned Operating Agreement. If you are going to have an employees, you would also file to get a tax identification number with the IRS.

An S corp., on the other hand, requires you to file Articles of Incorporation, draft Bylaws or a Code of Regulations, prepare a stock certificate, have regular meeting minutes of your Board of Directors and Shareholders, file for a tax identification number with the IRS, make a timely S election, register with the state, prepare a separate tax return for the state and fed each year for the business, prepare a K-1 for use with your personal tax return, complete an additional schedule on your personal tax return, establish payroll / withholding accounts, and run payments to you through payroll / withholding. It is a complete pain in the butt for a small business. All told, you are looking at spending an extra $2,000 - $4,000 a year from an accounting / bookeeping point of view. Also, if you want the S corp setup properly, you need to hire an attorney. I only charge $350 - $500, including filing fees, for a single-member LLC. I charge $1,000 - $1,500, because of the extra work involved, for an S corp.

Also, based on my experience, you are asking for trouble if you don't engage a CPA from the outset. They can help setup all of your local, state and federal tax-related accounts, advise you re. your various obligations (e.g., quarterly installments of income tax), and help you put in place an internal accounting system so you keep good books. If you want to run a real business, you need to make this relatively small investment on the outset.

Meier_Link · 10-22-2005, 06:15 PM

Well, you've convinced me to reconsider my course of action. It would be foolish to come on here asking for advice and then disregard it because it wasn't what I wanted to hear. LLC is probably the way to go; I didn't realize that you could be taxed as an S corp, I thought you could only be taxed as a partnership with an LLC.

Probably the best advice I'll ever take from a lawyer with a boner for his avatar

10-18-2005, 05:29 PM	#1 (permalink)
Meier_Link Psycho Location: in a state of confusion	S Corp v. Sole Proprietorship I am going to open my own real estate firm in the very near future. I'm fairly indigent right now, and certainly can't afford to consult a tax attorney. Sole proprietorship sounds good, because it's easy to set up, and as a broker you are always personally liable for what you do anyway. A friend advised me that there might be some big tax advantages to starting an S Corp instead. He told me I wouldn't have to consult an attorney, and could set it up on the internet for as little as $125. Looking for advice here.... Thanks for any suggestions.

10-19-2005, 04:42 AM	#2 (permalink)
Anxst Condensing fact from the vapor of nuance. Location: Madison, WI	Do a little research into which would best fit your situation. When I last started a business, we chose to go with an LLC, which worked well for us. You may also want to look into that. __________________ Don't mind me. I'm just releasing the insanity pressure from my headvalves.

10-19-2005, 06:35 PM	#3 (permalink)
Meier_Link Psycho Location: in a state of confusion	Here's my understanding of the situation, thus far. It is by far incomplete, so please correct me if I'm wrong. In a sole proprietorship, or LLC for that matter, when you pay taxes on your earnings, the entire amount is subject to employment tax, which includes MediCare and Social Security taxes. The advantage is that there are less restrictions and it is easier to file. With a subchapter S corporation, you may pay yourself a standard salary for what you do, which is subject to employment tax, and take the rest of your earnings as dividends, which saves you the MediCare and Social Security taxes you would otherwise be subject to. The big disadvantage is that you have all the paperwork involved with a corporation, along with a lot of restrictions... At this point I'm leaning toward the S Corp, if I can work my way through all the paperwork involved. __________________ life is a sexually transmitted disease

10-20-2005, 09:40 AM	#4 (permalink)
j8ear Gentlemen Farmer Location: Middle of nowhere, Jersey	I think you've outlined a pretty good understanding of the basic differences. Regardless of your 'indigent' status, it would be a wise decision to involve a tax attorney in your decisions, as this person will probably save you substantially in the long run. As a corp. of any kind having an attorney/tax pro in your corner, is practically essentially to ensure you are compliant with and protected from the IRS, and other unsavory character's like them. Since I've starting using one, my books, my taxes, my reporting requirements, my refunds, everything has been far superior then his cost. It's almost a no brainer to me. Think long and hard about going without. What do other real estate agents do to set up their own firms? Here's a brief primer on the various Delaware Incorporations from delaware intercorp...who I used to incorporate my LLC: https://www.delawareintercorp.com/orderform.htm -bear __________________ It's alot easier to ask for forgiveness then it is to ask for permission.

10-20-2005, 07:00 PM	#7 (permalink)
gar1976 Custom User Title Location: Lurking. Under the desk.	CPA here: S corps require you to take a salary and file a separate return. If you chose to use a payroll service (highly recommended) the increase in costs to you will be around $2,000 or so (also recommend having a professional do your taxes). Break-even for this is around $40,000 net income, assuming you're taking a salary of around $24,000 or so. Also, if you pay your health insurance for yourself and your family through the S Corp (allowed, fully deductible) it will be included on your W-2 as wages and "gross up" your officer compensation. Your officer compensation is listed separately on the 1120s, and the IRS is starting to aggressively examine these. You are allowed a return on your investment in the form of net income, plus earnings on your employees and inventory. It's late and I'm rambling, so maybe something more coherent will come out tomorrow. __________________ Blistex, in regards to crappy games - They made pong look like a story driven RPG with a dynamic campaign.

10-20-2005, 01:21 PM	#6 (permalink)
Elphaba Deja Moo Location: Olympic Peninsula, WA	Our CPA set us up first as a sole proprietorship, followed by an S Corp when our revenue increased. We formed a partnership a few years ago that was best structured as an LLC. For a variety of reasons, I think the S Corp is the best move for you. You're going to need a good CPA anyway, so choose one who can set up your business for you. It is sooo worth the money.

10-21-2005, 11:28 AM	#8 (permalink)
BCD Insane Location: Charlotte, NC	I promise that this is the best advice you will ever receive from a business lawyer who uses a picture of his boner for his avatar. I typically advise small business clients to wait a year before starting an S corp. It doesn't make sense to incur the expense and headaches associated with S corp (adequately discussed above) right out of the gate, since it is not uncommon for a business to shut down within the first year or two or you end up not making enough 'jack' to benefit from the tax play that is available. Also, it is very important to note that the IRS knows this tax play is common and they are getting much more agressive at pursuing people who abuse this tax play. Given that you will be a service business and deriving almost all (if not all) of your income through your own efforts, it would be hard to justify this tax play if you were caught. This means penalties and interest. Having said that, I typically recommend clients start out as a single-member LLC (vs. sole proprietorship) for the following reasons: (i) They are extremely cheap and easy to setup; (ii) they offer you the same sort of contract / tort protection you would have with an S corp; (iii) the separate entity gives your business more credibility; (iv) you are treated for federal income tax purposes (and often state income tax purposes) as if you were a sole proprietorship, which means your tax compliance expenses shouldn't be any greater than if you were a sole proprietor; and (v) it is easy to have the LLC taxed as an S corp down the road should your business prove viable and there is sufficient $ coming in to take advantage of the discussed tax play.

10-22-2005, 11:48 AM	#10 (permalink)
BCD Insane Location: Charlotte, NC	Here's the thing you're missing. A single-member LLC can elect to be taxed as either an S corp or a sole proprietorship. Under my proposal your LLC starts off as being taxed as a sole proprietorship and later elects to be taxed as an S corp. For all other purposes, the LLC remains the same LLC (i.e., Meier_Link, LLC will still be Meier_Link, LLC - not Meier_Link, Inc. - after the change in tax classification) so you don't need to go back to the Board of Realtors or Real Estate Commission. An LLC can also adopt assumed names, so you can use it for different business ventures. The extra expense that you don't see is that when you organize a single-member LLC, all you do is file basic Articles of Organization with your Secretary of State, register with you state's Dept. of Revenue, and sign a canned Operating Agreement. If you are going to have an employees, you would also file to get a tax identification number with the IRS. An S corp., on the other hand, requires you to file Articles of Incorporation, draft Bylaws or a Code of Regulations, prepare a stock certificate, have regular meeting minutes of your Board of Directors and Shareholders, file for a tax identification number with the IRS, make a timely S election, register with the state, prepare a separate tax return for the state and fed each year for the business, prepare a K-1 for use with your personal tax return, complete an additional schedule on your personal tax return, establish payroll / withholding accounts, and run payments to you through payroll / withholding. It is a complete pain in the butt for a small business. All told, you are looking at spending an extra $2,000 - $4,000 a year from an accounting / bookeeping point of view. Also, if you want the S corp setup properly, you need to hire an attorney. I only charge $350 - $500, including filing fees, for a single-member LLC. I charge $1,000 - $1,500, because of the extra work involved, for an S corp. Also, based on my experience, you are asking for trouble if you don't engage a CPA from the outset. They can help setup all of your local, state and federal tax-related accounts, advise you re. your various obligations (e.g., quarterly installments of income tax), and help you put in place an internal accounting system so you keep good books. If you want to run a real business, you need to make this relatively small investment on the outset.

10-22-2005, 06:15 PM	#11 (permalink)
Meier_Link Psycho Location: in a state of confusion	Well, you've convinced me to reconsider my course of action. It would be foolish to come on here asking for advice and then disregard it because it wasn't what I wanted to hear. LLC is probably the way to go; I didn't realize that you could be taxed as an S corp, I thought you could only be taxed as a partnership with an LLC. Probably the best advice I'll ever take from a lawyer with a boner for his avatar __________________ life is a sexually transmitted disease