Structure as an LLC or S corporation?
|  Dear
Tax Talk,
I own some commercial property in which I plan to build
a new shop for my existing business which manufactures decorative architectural
components such as staircases, archways, specialty mill work, etc. I'm working
on becoming an S corporation or LLC but can't decide which is best. I've been
advised, by someone, to separate the land and buildings as one company and my
existing business as another company. My existing company then leases the land
and building from my other company. If I have two companies, then are they both
to be LLC, S corporations or one of each? The other alternative is for my existing
company, land and building to be one entity. Which is better and do I become an
LLC or S corporation? I would appreciate any help.
-- William
Dear William,
Advantages and disadvantages vary by individual circumstances, state
taxes and organizational needs. The general rule is that an operating
business should be a corporation. A conventional corporation (one
that is not an S corporation) can pay less tax than an individual
on its first $50,000 to $75,000 in taxable income. This allows the
corporation to build up its working capital through earnings at
lower tax rates. A corporation that makes an election to be treated
as an S corporation also has advantages. An S corporation only has
one level of tax, which may be beneficial if you intend to sell
the business down the road.
Corporations and LLCs generally compute their taxable
incomes in the same way so that income tax differences are minimal.
However, if you operate a trade or business through an LLC, the
net income is subject to self-employment tax of 15.3 percent even
if there is no money to pay salaries. The net income of the company
can be tied up in working capital such as inventory and accounts
receivable, on which you will have to pay the self-employment tax.
This would not be the case with a corporation.
A one-member LLC is disregarded for tax purposes.
If you operate a business through a one-member LLC, this means that
you will report the income directly on Schedule C of your Form 1040.
If you have a rental property through a one-member LLC, you will
report the activity on Schedule E of your Form 1040.
In some states, such as Florida, if you lease property
to a separate legal entity, you have to pay sales tax on the rent.
Hence it may make sense to combine the property into the trade or
business entity to avoid this additional tax. However, you would
almost never want to put real property into a conventional corporation
due to double taxation and lack of preferential capital gains rates.
When deciding your structural organization, you really need the advice of a good CPA and attorney.
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