Pros/Cons of an S-corp vs. LLC for a handyman/repairs business

Not necessarily. The general rule is that you need to keep GOOD RECORDS. Good records are good records regardless of whether you're a Schedule C, C Corp, S Corp, LLC, or a Trust.

Not necessarily - 1099s are required to be issued when someone is paid during the normal course of BUSINESS. So if you come to my HOME to fix my washing machine it matters not a lick what I pay you, it was NOT part of MY BUSINESS so no 1099 would be required. On the other hand, if you came to MY OFFICE to fix my furnace I'd have to issue a 1099 to you if were anything OTHER than a corporation.

This is correct, but may be meaningless. When you have a corporation you have to take a REASONABLE SALARY, assuming the corp is operating at a profit. Payroll taxes (15.3%) themselves can be equal to or more than the "double taxation" you'd face if you were a C corp and distributed qualified dividends that get taxed at 15%.

An S Corp owner can take some of his money out as a distribution of profit. BUT the IRS is taking exception in certain circumstances - some of which I agree with and some of which I don't. For example, if you were a professional S Corp (doctor, lawyer, accountant, engineer, IT, Consultant, Artist) and company income is the result of the efforts of THREE OR FEWER owners/employees, the IRS is trying (operative work is TRYING - the tried and failed to pass this last year and I fear it will come back to haunt us) to subject profit distributions to Self Employment taxes. Likewise, some tax pros argue that if there is ONLY one employee that all the profit MUST be the result of that person's efforts, hence they think that all money taken should be treated as payroll.

Maybe, see my comment above.

Whatever you do, form the company in the same state you're going to MOST or ALL of your work in. Many people think if they form in "Tax Free Nevada" that they don't have to pay tax - NOT TRUE. You have to file and pay tax for any state that you work in (that has an income tax) regardless of where you're formed. Plus you'll have to register to do business in each state you work in.

A few other things to consider -

A) if its only you and no one else, no employees - either a single member LLC or a Schedule C means you will NOT have to run payroll for yourself. If you set up either a C or S Corp you'll need to run payroll;

B) LLC members and Schedule C sole proprietors are NOT allowed to take payroll, so you'll have to make estimated tax payments. Some folks find it hard to SAVE UP the money and make only 4 estimated tax payments. If you need budgeting help being on payroll can mean MONTHLY instead of quarterly payments. Some folks find it easy to send in the money more frequently because its easier for them to accumulate the cash;

C) a single member LLC is a disregarded entity. As such it files a Schedule C. Schedule C owners pay Self Employment tax on the NET INCOME from the business EVEN if there is no income tax because of itemized deductions. So you have no ability to even consider distributing some of the money as profit NOT subject to payroll or SE tax;

D) Corporations are subject to more strict state compliance rules than LLCs - GENERALLY. For example, Maryland says ALL corporations MUST hold an annual meeting of the directors/stockholders - even if it is just YOU. BUT LLCs don't have to have that meeting. NOTE - that does not mean that having the meeting is bad idea. I recommend all my business clients have an annual meeting to record decisions. This stuff comes in handy during an audit by the taxing authorities.

There a host of other items - I actually have a 33 Item list of the different attributes and how they play out for different entities. Were you a client of mine I could supply you with that list. NOTE - this is NOT a solicitation for work. It?s a statement that most good tax pros consider various factors when a business is being formed and very few of us do it for free.

Good luck, Gene E. Utterback, EA, RFC, ABA

You can also try "difference between s corp and llc" or such in your favorite search engine. That's just to get started. The information from a pro will be better.

That's true. Get a separate bank account, separate credit cards, etc for your Schedule C business or single member LLC.

Two nice things about single member LLC are that: You don't have to file 1120-S which is due by 3/15 and will cost more than just adding a Schedule C to your normal individual tax return; you get a deduction for one half of self-employment tax which makes your federal and state tax less.

I think CA passed such a law recently as well. Also in CA, corporations don't have to pay the $800 minimum tax in the first year, but LLC's have to. In the second year, both LLC and S corps have to pay the $800 minimum tax -- even if the corporation/LLC has a loss! In addition, in CA distributions from the corporation are subject to an additional 1.5% of tax, which matters if the corporation makes a lot of money -- say you take a distribute of $10,000 -- so 1.5% is just $150 and you have to pay an additional $650 to meet the $800 minimum so it doesn't matter because you have to pay at least $800, but if you take a distribution of $100,000 -- then 1.5% is $1500 so you pay $700 in addition to the $800 minimum tax. And if you're an LLC you have to pay a fee based on the profits you make. These additional tax considerations are in CA only.

May I suggest that you first weigh the need for a separate legal entity? There is no difference in the Federal tax world between a single-member LLC and an unincorporated sole proprietor. (A sole prop can get an EIN if you're worried about giving your SSN to customers.) My first inquiry would be to a lawyer who's not in the business of churning out LLC's. There are ways other than incorporation to deal with liability issues. Insurance, for one.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

May I suggest that you first weigh the need for a separate legal entity? There is no difference in the Federal tax world between a single-member LLC and an unincorporated sole proprietor. (A sole prop can get an EIN if you're worried about giving your SSN to customers.) My first inquiry would be to a lawyer who's not in the business of churning out LLC's. There are ways other than incorporation to deal with liability issues. Insurance, for one.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

...

Phil and Gene together have provided much useful information and advice in this thread.

In particular, Phil's suggestion of insurance is important. THere is no legal entity that is an adequate substitute for a comprehensive liability insurance policy.

Well, a slight difference, because a single member LLC can elect to be taxed as a corporation, either C or S. But as you say, they are normally taxed as sole proprietorships.

One difference is that an LLC has limited liability to an extent. But I normally tell people that if they have to choose, a good liability insurance policy is more important and more useful.

There also may be local fees or taxes for having an LLC - at least there are here in California.

___ Stu

"local"? do you mean below the state level?

The main reason for a small contractor to form an S-Corporation is because any profits in excess of a fair salary save 15.3% on taxes. The employer (7.65%) and employee (7.65%) contribution to FICA are *not* charged on profits of the S-Corporation. Those profits are passed through on Schedule K-1 of the S-Corporation to its shareholders. Those profits will be taxed as ordinary income, but will not be subject to FICA, which is an additional tax that only applies on wages up to some maximum capped amount.

It is important to not use this as a tax loophole. You cannot form an S-Corporation, then pay yourself $5K in salary, and use the above fact as a way to avoid FICA entirely. The IRS would eat you alive and you would become an audit target. But you can pay yourself a fair and ordinary salary as a contractor (which I guess would not be less than about $50K?) and if you have a very good year, then the surplus profit will come through on the Schedule K-1 as profit from a business, not subject to FICA.

Some details about this are here (skip the section in middle on qualified dividends, which don't apply to an S-Corporation):

One thing I will say is that if you go with an S-Corporation, make sure you find an accountant who understands S-Corporation "basis" inside and out. S-Corporations can have very complex basis issues that affect whether distributions from the S-Corporation are taxable, and the tax rate that applies.

By that, I meant what you wrote below about corporations having to be more a little careful about having annual meetings, etc.

Thanks. You are correct. But, what I forgot to include in my original message is that the "handyman/home-repairs" business would be doing a lot of work for real estate investors who own rental properties or are doing a buy-rehab-sell type of real estate business. So, those "customers" of the handyman/home-repair business would be businesses themselves. Nevertheless, I appreciate the point you made about ordinary home owner customers not needing to do 1099's, which is something that I had not thought about.

That is an interesting point. I remember a friend of mine having a S-corp set up by an attorney a few years ago for her small business, and her CPA worked out with her and the attorney that she would own 90% of the shares and each of her two children would own 5% of the shares. Now that you point that out, I think that was probably part of the reason for doing it that way.

That is a definite "will do".

I do know that one and know that the whole "Nevada corporation" idea is a waste of time and money.

All good points.

Thanks again for taking the time to write all of this out. It is really helpful.

Thank you Phil, Gene, and Bill.

I agree that insurance is key. In this case, there would be some protection from liability due to the entity structure and additional protection through the entity having good insurance.

I think that one of the downsides of only basing protection on insurance coverage is that the insurance company always has an incentive to try to deny coverage whenever possible. So, if the insurance company is able to find a loophole to get out of having to cover the claim, the individual is then left with exposure to the liability. But, if an insurance company is able to find a loophole to get out of covering a claim for an entity that is insured, the fall-back position for the entity may be that the claim can only go against the assets of the entity and (hopefully) not the individual entity owner.

Okay. Got it. Thanks.

Since we are in New Jersey, most of this is different and some is opposite to what CA does. For example, in NJ, single-member LLC's do not have to pay any minimum state income tax, but any corporation (even if it does no business and has zero income and expenses; or if it does business has zero profits or even a loss) must pay a minimum state income tax of $500/year. And, in NJ, there is no state income tax on shares of a corporation or assets of an LLC.

Thanks for the information. I also checked out the link and is helpful.

If it's a one-man business there won't be very much protection from liability due to the entity structure. You're always personally responsible for your own tortious actions. There's no business structure you can set up to avoid that liability.

Where liability protection would come in is to the extent other parties are willing to accept obligations of the entity without demanding a personal guarantee from you. So for example, if your bank is willing to give a loan to your one-man S-corp or LLC, then yes, you wouldn't personally be on the hook if the business defaulted on the loan (assuming you obeyed all the formalities so the veil can't be pierced).