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S-Corp or LLC


Bluestone

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Disclaimer: I got a little confused on this. The title says S-Corp but I was referring to a C-Corp. Sorry for the confusion.

A few days ago we were ready to file to set up our LLC. But at the last minute I asked my accountant a few questions and now we're considering forming an C-corp. It's just my wife and me as partners. Here's why:

As an LLC your company is considered a pass-through entity. All company profits will be entered on your personal taxes because there is no corporate tax on LLC's. That means fewer forms at tax time, but you do have to pay quarterlies and Social Security out of your own pocket. Even if you leave money in the company account it still gets reported and you have to pay personal taxes on that money.

As a C-corp your company is actually a separate entity. It pays corporate taxes on profits. (rates are better below $75K) Taxes are more complicated but the company does pay employer contributions. You have to have meetings. You draw a reasonable wage and pay personal taxes on that amount.

The reason this is a huge concern for us is that we have to consider financial aid for our college age daughter. As an LLC the company and personal income is muddled. I believe we'll look better on paper than we really are even though it's the company that's retaining profits, not us personally. Those company savings will be for rainy days, expansion, etc. So right now the C-corp looks like more hassle but an overall benefit.

I'm by no means an expert but this is my understanding. Advice or opinions will be appreciated.

Edited by Bluestone
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Totally on the same page Bluestone. I'm really curious why so many distillers seem to opt for the LLC. I'm planning on going S-Corp for the distillery operations and an LLC for the capital holdings (real estate, equipment, etc.) Yeah, the taxes are a bit more complicated but that's what the accountant's for.

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LLC can work out better during the early start up stages where you are reporting regular losses, if you are also still working a day job. That is because you can offset those losses against your other earned income, and save quite a bit on taxes.

Once the business becomes profitable, and if the business starts to become a source of personal income for you, then it makes more sense to switch over to a corporation. And it is not that hard to do.

On the other hand, if you had started out as a corporation, the losses in the first few years could be used to offset income in future years. But at the expense of the so-called double taxation, if you had to report some personal income from the corporation.

This all pertains to sole ownership. Everything is different if there are significant external investors involved at the start.

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After reading your responses I called the accountant again. She hates the C-corp idea for many reasons, including the double+ taxation. In the end her recommendation was to form an LLC with S-Corp status. It's easy to organize and operate, will offset against other income early on, and with the S-Corp tax status one can draw a wage. I don't quite understand the details but, although the company profits are passed through, if they are not distributed they aren't considered personal income.

We'll get this started as best we can and if changes need to be made later we'll make them.

You guys were very helpful. Thank you.

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If you are going to change entity type, just be sure that you know the TTB's rules before you enter the process.

http://www.ttb.gov/spirits/makechanges.shtml

I worked for a wholesaler who decided to convert from a LLC to to a S-corp, and did not check with the TTB on how this would affect his permit before starting the process. Much money and time were wasted on lawyers and work stoppages until things got worked out.

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LLC can work out better during the early start up stages where you are reporting regular losses, if you are also still working a day job. That is because you can offset those losses against your other earned income, and save quite a bit on taxes.

Same is true of S-Corp as long as you've got sufficient tax basis to cover the corp losses. IOW, if you only put $10K into the business, and it has $12K of losses, you only get to deduct $10K from your income. The remaining $2K carries forward though.

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We had the same questions, and, for what its worth, 1) we went with the LLC to start, 2) I was convinced after lots of numbers were run in front of me that, given that you're taking solid counsel from your accountant, that you should be able to come out in a wash between most LLC vs. C-Corp scenarios you could have.

-Ian Newton

Baltimore Whiskey Company LLC

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