S-Corp v. Sole Member LLC II analysis

We are ready to crunch some numbers in the California sole member LLC versus S-Corp faceoff. If you have not already, please check out the prior installment and the book, Tax Prep and Plan free HERE !!! little thanks for reading. So S-Corp sounds juicy, but it is a pain in the butt. It is uncertain… even aggressive… oh ya. Aggressive? Aggressive. One of those love and hate adjectives. I am not writing aggressive am I? No? Ok good, or, wait, don’t you like aggressive? Just as it is in real human relationships – so does the paradigm of good versus bad aggressive shifts between the taxpayer and the IRS. All jokes aside, let’s take a look at the cost and benefits of the relatively simple sole member LLC entity (follows the rules of a sole-proprietor) and compare it to the more exotic and aggressive S-Corp. Aggressive.

It is important to understand that this writing is for educational purposes, complete opinion, uses massive assumptions, possibly has outdated tax rates and thresholds and is for illustrative purposes and you should consult both a Certified Public Accountant and an Attorney to address your own situation as there are huge variances in planning that may exist. Inherent in any plan is uncertainty. We cannot predict the future. Proceed with caution, this is not advice.

This series is an attempt to answer a rather common question I receive, “Should I be an S-Corp or sole member LLC?” While I see this as generally straightforward decision we are a dozen pages in trying to explain the basics via this blog series. Any questions, please contact me, John at Gillingham CPA .com

There are a lot of variables that make the S-Corp structure potentially better in tax savings “net of fees” or in other words… how much does the entity save in tax less the business owner’s sweat equity less the fees required to pay a CPA. The prior series covers the basic mechanics and general scenarios where the S-Corp structure is a viable option.

Major variables:

-Fair compensation as a business owner
-Grand total tax savings given various business revenue profiles
-Revenue versus profit as it relates to California LLC or S-Corp fees
-Total additional CPA fees
-Total additional sweat equity hours of the business owner spent on a more complicated entity

Fixed Variables:

-California business entity comparison for sole owner LLC or S-Corp
-Total FICA (Social Security Taxes 12.4% and Medicare Taxes 2.9%)
-Social Security limit $127,200
-SDI, Futa, Miscellaneous payroll fee at a fixed $1,100
-Payroll compliance cost (budget provider) $500 a year                  (additional compared to sole proprietor)
-S-Corp tax return prep fees and accounting costs $1,550
-Sole member LLC return prep fees and accounting costs $250 (additional compared to sole proprietor)
-Additional S-corp owner annual compliance time 7 hrs (formation time amortized)
-Additional LLC owner annual compliance time 2 hrs (formation time amortized)

Case study 1 – Wholesale Apparel Importer

“High Gross, Lower Net” (High income and lower relative profit to other examples)

-Income $3,000,000
-Profit $500,000
-Fair compensation $200,000

Case study 1 – Conclusion

With total possible gross tax savings after compliance fees in the $8,000 range – or after tax, money in the checking account savings of around $4,000… it is likely worth the additional 5 hrs or so compliance headache. Unknowns are how a court would determine fair compensation.

Case study 2 – Please Contact John at Gillingham CPA dot Com.

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