Is It Time to Set up a LLC/S Corp?

If you are an entrepreneur or self-employed person, choosing the right entity is important to launching your dream income generator. In the last decade, the LLC or Limited Liability Corporation has become the most popular vehicle for entity formation. Why so popular? Probably its low-cost set-up, simplicity and also its malleability (as you will see below).

Lets explore the tax implications for your LLC?

• Single-member LLC – if you are setting the LLC up just for yourself, the LLC is mostly a cosmetic improvement on a sole proprietorship, reporting profits/losses on your 1040 – Schedule C (while getting some liability protection). You will still be responsible for your social security/medicare taxes (FICA) up to the Social Security cap (which is $168,600 in 2024).
• Multiple-member LLC – if you are setting this up for yourself and other(s), you will default as a partnership and file a 1065 form annually. One of the members will have to be the “General Partner” and subject to the FICA as above. Other partners can be “Limited Liability Partners,” not subject to FICA, but “passive” participants and so limited in using any losses.
• Multiple-member LLC for a married couple – if you live in a community property state like Washington state, California, or Texas - married couples can be taxed as a sole prop (single member LLC) for simplicity or a partnership above... Your choice.
• The LLC that elects to be a S corp – As we have advocated strongly on a recent podcast, if your business is a cash flow generator, the S corp is a very attractive option for LLCs as you won’t be taxed for FICA (except for your payroll which S corp owners should put themselves on). You have 75 days to apply to be a S corp from formation and 3 years and 75 days to ask for late S corp election relief on your form 2553.
• The LLC – S corp for Expats – if you are a US expat and know you’ll be on the hook for US FICA as you don’t want to participate in your host country’s Social Security system, you might become a S corp, go on payroll for the FICA, but have most of your income , payroll and profits excluded using the Foreign Earned Income Exclusion.
• BOI anti-money laundering requirements. In 2024, you or your lawyer/accountant, will need to report your LLC, 90 days after formation thru the Financial Crimes Network. The BOI – beneficial ownership information requirement – was created by Congress to combat money-laundering.